Demand & Supply Equilibrium

Demand & Supply Equilibrium

Modigliani

Kezia from Colorado asks me to take a shot at explaining just what the AP exam is looking for when it comes to Equilibrium.

Demand and Supply equilibrium, is with given shifts in demand and supply we can then tell what has happened to the price and quantity of a specific good.

First what we know:

Demand Decreases or Increases - What happens to the price and quantity?

When the demand shifts left (decreases) then the Price & Quantity decreases.

When demand shifts right (increases) then Price & Quantity increases.

Ok so far?

Supply Increases or Decreases   - What happens to price and quantity?

When the supply shifts right (increases) then the Price decreases & Quantity increases.

When supply shifts left (decreases) then Price increases & Quantity decreases.

Demand Increases and then Supply Increases, not once , not twice, but three times.

(Work with me, I'm trying to make a point)

Demand & Supply curve are originally in equilibrium at Point E1

The original Equilibrium point is at (E1)

Price is at PE1 

Quantity is at QE1

Demand Increases to D2

Demand Shifts Right (increases) 

Find the new equilibrium point (E2)

Price has increased to PE2 and Quantity has increased to QE2.

at this point we can say for certain that

Price has increased

Quantity has increased

 But, now Supply Increases (shifts right) to S2

Supply Shifts Right (increases) to S2

Find the new equilibrium point (E3)

Price decreases to PE3

Quantity Increases to QE3

Price originally increased to PE2 

but now decreases to PE3, so price is (Uncertain)

Quantity has definitely increased to QE3

and finally, Supply Increases again to S3

Supply Shifts right (increases) to S3

New equilibrium point is at E4

Price decreases to PE4

Quantity Increases to QE4

Price is Uncertain 

Quantity Increased

From the Demand & Supply Cheat Sheet here

Understand that you can either memorise these demand and supply shifts (not suggested) as they will not change.

So, If Demand increases and supply increases, 

then Price will be uncertain and quantity will increase.

This happens no matter how you draw the curves, close or far apart.

I suggest drawing the graphs as you read the questions, then look for the equilibrium points.

How does the AP exam test these questions.

1995 AP Exam

Answer - E

2008 AP Exam

Answer - D

Government increases tax - supply decreases

People commute longer distances - demand for gas increases

2012 Multiple Choice (Supply & Demand)

2012 Multiple Choice (Supply & Demand)

 I like it...

Answer - (B) increasing demand for pretzels and therefore  the price of pretzels

Answer - (D) decrease decrease

This question is a bit confusing,,, but answer me this....

If I give you money to hire city workers,,,, what will happen to the demand for rural(country) workers

The demand for rural workers will decrease,,, 

Price (wage rate) will fall as demand has decreased for rural workers

and quantity demanded for rural workers will fall (as will their total hours of work)

Answer - (B)

Look closely at the marginal utility curve,,,,, it is downward sloping
Utility (value, satisfaction, benefit) falls with each unit consumed.

Answer - (C)

(A) Less supply of oranges, price increases

(B) Price apples increases, demand for oranges increases, price for oranges increases

(C) Oranges cause cancer, demand for oranges decrease, price decreases

(D) Supply oranges decrease, price increases

(E) Advertising increases demand, price increases

Answer - (D) decrease because hamburgers and onions are complements

Answer - (A)

This question should really be in the Government intervention section for indirect taxes.

If the price is higher due to a tax.

Consumers now pay more for the good, their surplus has decreased

Producers receive less for the good, their surplus has decreased

(((Total surplus is maximised where D=S, at market equilibrium)))

Answer - (C)

In explaining the diamond-water paradox, marginalists explain that it is not the total usefulness of diamonds or water that determines price, but the usefulness of each unit of water or diamonds. It is true that the total utility of water to people is tremendous, because they need it to survive. However, since water is in such large supply in the world, the marginal utility of water is low. In other words, each additional unit of water that becomes available can be applied to less urgent uses as more urgent uses for water are satisfied.

Therefore, any particular unit of water becomes worth less to people as the supply of water increases. On the other hand, diamonds are in much lower supply. They are of such low supply that the usefulness of one additional diamond is greater than the usefulness of one additional glass of water, which is in abundant supply. Thus, diamonds are worth more to people. Therefore, those who want diamonds are willing to pay a higher price for one diamond than for one glass of water, and sellers of diamonds ask a price for one diamond that is higher than for one glass of water.

Conversely, a man dying of thirst in a desert would have greater marginal use for water than for diamonds so would pay more for water, perhaps up to the point at which he was no longer dying.

Answer - (A)

Supply and demand cheat sheet here.
A lower priced good (downward sloping demand) causes us to have higher purchasing power (it's like our income increased) and the ability to substitute a lower priced good for a higher priced good increases our purchasing power (the amount of goods we can buy for a dollar) both effects increase our purchasing power and hence,,, our incomes.

Demand & Supply Question #2 AP Micro exam 2000

Answer - (D)  "The release of three summer movies set records for movie attendance"

 (A) If the wages of farm workers and movie theater employee increase, the supply of popcorn and movies will decrease (shift to the left).

 (B) If there is a technological advance in corn production, the supply of popcorn will increase (shift to the right).

(C) If there is more competition, price will decrease because of the increased number of sellers.

(D) "The release of three summer movies set records for movie attendance" means that the quantity demand of movie attendance increases. Since popcorn and movie attendance are complements, the demand of popcorn increases. As a result, the price increases and the quantity increases of popcorn.

(E) New government regulations increase the cost of production and, therefore, cause supply to decrease.

Demand & Supply (2008) Multiple Choice

Demand & Supply (2008) Multiple Choice

2008

2008

#3 - D

#4 - D

#13 - B

#20 - B

#21 - C

#33 - C

#48 - A

#49 -  B

Demand & Supply (2005) Multiple Choice

Demand & Supply (2005) Multiple Choice

2005

2005

#5 - B

#17 - B
#19 - A

#20 - D

#30 -C

#32 - D

#33 - B

#34 - B

#47 - B

#50 - B

Demand & Supply (2000) Multiple Choice

Demand & Supply (2000) Multiple Choice

2000

2000

#2 – D

#4 – D

#5 – A

#9 – E

#18 - B

#21 - D

#33 – C

#48 – B