Principles of Economics by Libby Rittenberg and Timothy Tregarthen.Chapter 3: Demand and Supply 

  • Principles of Economics by Libby Rittenberg and Timothy Tregarthen.Chapter 3: Demand and Supply
  • Suggested reading: Introduction to Economic Analysis, pp. 13 – 26.

Part 1: Chapter 3

Gasoline “prices at the pump” go up and down and Oil “costs per barrel” go up or down, but they do so at different rates and even in opposite directions sometimes.  We want to think that demand and supply controls prices where the cost of crude oil is set by the same economic conditions that determine the price of gas.  What are these mismatched trends (graphs of each are shown in the following web links) telling us about how demand and supply work in the market?

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EER_EPMRU_PF4_Y35NY_DPG&f=A

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=A

Part 2

A supply-demand graph can be described as having a demand curve that begins in the upper left and slopes downward to the lower right; and having a supply curve that begins in the lower left and slopes upward to the upper right. Using words in a narrative, please describe and explain how both the equilibrium price and quantity will change when:

a) Only supply decreasesb) Only supply increasesc) Only demand increasesd) Only demand decreases

Part 3: Chapter 5

Suppose you are the manager of a restaurant that serves an average of 400 meals per day at an average price per meal of $20. On the basis of a survey, you have determined that reducing the price of an average meal to $18 would increase the quantity demanded to 450 per day.

  1. Compute the price elasticity of demand between these two points.
  2. Would you expect total revenues to rise or fall? Explain.
  3. Suppose you have reduced the average price of a meal to $18 and are considering a further reduction to $16. Another survey shows that the quantity demanded of meals will increase from 450 to 500 per day. Compute the price elasticity of demand between these two points.
  4. Would you expect total revenue to rise or fall as a result of this second price reduction? Explain.
  5. Compute total revenue at the three meal prices. Do these totals confirm your answers in (b) and (d) above?

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