Supply and Demand

Department of Economics                                                     Prof. Andrew J. Buck
Temple University                                                                 Economics 3501



A.  Caraway Seeds

            East Egg and West Egg are two independent island economies separated by Baker Channel, a waterway un-crossable by boat or airplane due to treacherous weather conditions.  Caraway seeds are produced and sold under conditions of perfect competition on both islands.  The supply and demand schedules for the two markets are shown below.  The Q’s are measured in pounds and P is price per pound.

East Egg
West Egg


1.   What is equilibrium price in East Egg?

2.   What is equilibrium quantity in West Egg? 

3.   What is the slope of the West Egg demand curve?

4.   The Myrtle Wilson Memorial Bridge is now built between the two islands making it
      costless to transport seeds from one to the other (and thus creating a unified market).
      What will be the new equilibrium price in East Egg?

5.   What will be the new equilibrium quantity consumed in West Egg? 

6.   What will be the new equilibrium quantity produced in West Egg?                         

B.  Gopher Wood

7.   Preliminary research on the market for gopher wood in Ararat indicates that it is
perfectly competitive with the following supply and demand relationships:

            Q = 8 - 0.6P                    Q = 1.4P - 4 

Which equation represents supply?  Which represents demand? Put your answer in the above boxes.

8.   Solve these equations for equilibrium price and quantity.  

Equilibrium Quantity Equilibrium Price

9.  Further statistical study reveals that the demand equation specified above is
incorrect because it ignores the price of  Lebanese cedar (P*), a close substitute
for gopher wood.   The correct relationship is

                                         Q = 4 – 0.6P + 2P*.

        Solve for the price and quantity reduced form equations.

P =


  Intercept   Slope  
Q = + P*


10.  How much will equilibrium quantity change in response to a one unit increase in 

11.  If P* = 2, what are equilibrium price and quantity

C.  Hair Care Products

            The markets for five hair care products are known to be perfectly competitive. For each of the five cases below draw supply and demand curves, labeling them S1 and D1 respectively, on some scrap paper.  Then draw the new supply or demand curve (or both) resulting from the outside event (or events) as they affect each market.  Label these S2 and D2. 

            In the questions below, indicate for each market what happens to demand, supply, equilibrium price, and equilibrium quantity.  In the boxes use 'up' or 'down' to indicate increase or decrease.  If there is no change, use 0.  If an effect cannot be deduced from the information given, use X.

12.  Market: Scalp Razors

       Event:   Oprah Winfrey shaves Michael Jordan's head on
national  television.

Demand    Supply   Price Quantity

13.  Market: Combs

       Event:   Comb production shifts overseas to reduce costs.

Demand    Supply    Price   Quantity

14.  Market: Hair Dye

       Event:   Vogue announces "Gray is OK" just as the price of
the chemicals used to make dye increases.

Demand    Supply    Price    Quantity

15.  Market: Dryers

       Event:   Cost-saving techniques are introduced at the same
time that dryer use is shown to increase hair loss.

Demand    Supply    Price   Quantity

16.  Market: Mousse

       Event:   Dog owners start using mousse on their pets just as
teens switch to more "natural" hair styles.

       Demand    Supply Price Quantity

D.  Runcible Spoons

            The market for runcible spoons in a certain economy is perfectly competitive.  The demand and supply functions are as follows:

Demand:       Qd = 1000 - 10P
Supply:        Qs = 10P

17.  Solve for equilibrium price and quantity.  Price   Quantity

18.  An excise tax of $t per unit is imposed by the government on each spoon sold.  This
will cause the price paid by demanders (Pd) to exceed the price received by suppliers
(Ps) by the amount of the tax  -- i.e., Pd = Ps + t.  (It doesn't matter whether the tax is
paid forward to the government by buyers or sellers.)  Solve for the reduced form equations.

                                    Q   =   + t

                                     Pd =   + t

                                     Ps  =   + t

19.  If t = 10, what are equilibrium quantity, demand price, and supply price?

Q =        Pd =    Ps =

20.  If t = 10, how much revenue does the government get from the tax? 

21.  Derive an equation showing how government tax revenue (T) varies with the tax rate
(t), and ONLY the tax rate.  (I don't want to see any other variables on the right hand
side.)  This relationship is known as a Laffer equation.

Tax Revenue = + t + t2