Activity No.

1 Demand and Supply

Name: ____________________________ Course & Section: __________________

1. Suppose during 2003/04 the number of cars sold in Bahrain increases despite an
increase in cars prices. How can this be explained? D↑ while S remained constant.
2. Because of health awareness many people reduces their consumption of animal oil and
increase their consumption of vegetable oil to reduce cholesterol problems. What will
happen to DC of both products?
3. Suppose you have the following data about the price, quantity demanded and, quantity
supplied of a specific good
P Qd Qs
5 70 0
10 55 20
15 40 40
20 25 60
25 10 80
a. What is the equilibrium price and quantity?
b. Is there a surplus or shortage when P = 10? Why?
c. Is there a surplus or shortage when P = 20? Why?
d. What is the highest price at which buyers are willing and able to buy 55 units?
e. What is the minimum price at which sellers are willing and able to sell 60 units?
f. What will happen in the market if price ceiling of 10 was in effect?

g. What will happen to demand curve, supply curve and P* and Q* if

i. An increase in the price of a substitute good
ii. A decrease in consumers' income
iii. An increase in the cost of factors of production

h. Suppose a new technology has been discovered to reduce the cost of the good, but the
demand for this good has decreased because of a new substitute. What is the impact on
P*, Q*, other things remain the same?

i. Suppose some unfavorable conditions severely affected the supply of this good while
its demand increased because of the decrease in the price of a complement, what will
happen to P* and Q*?

Activity No. 2 Demand and Supply

Name: ____________________________ Course & Section: __________________

Managerial Economics by: Exequiel Mendoza Perez 64

Critical Thinking Questions

1) Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or
lower than at the equilibrium price of $1.40 per gallon? And what about the quantity
supplied? Is there a shortage or a surplus in the market? If so, of how much?

2) Why do economists use the ceteris paribus assumption?

3) Many changes are affecting the market for oil. Predict how each of the following
events will affect the equilibrium price and quantity in the market for oil. In each case,
state how the event will affect the supply and demand diagram. Create a sketch of the
diagram if necessary.

A) Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

B) The winter is exceptionally cold.

C) A major discovery of new oil is made off the coast of Norway.

D) The economies of some major oil-using nations, like Japan, slow down.

E) A war in the Middle East disrupts oil-pumping schedules.

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F) Landlords install additional insulation in buildings.

G) The price of solar energy falls dramatically.

H) Chemical companies invent a new, popular kind of plastic made from oil.

4) Consider the demand for hamburgers. If the price of a substitute good (for example,
hot dogs) increases and the price of a complement good (for example, hamburger buns)
increases, can you tell for sure what will happen to the demand for hamburgers? Why or
why not? Illustrate your answer with a graph.

5) Suppose there is soda tax to curb obesity. What should a reduction in the soda tax do
to the supply of sodas and to the equilibrium price and quantity? Can you show this
graphically? Hint: assume that the soda tax is collected from the sellers

Activity No. 3 Demand and Supply

Name: ____________________________ Course & Section: __________________

Managerial Economics by: Exequiel Mendoza Perez 66

Directions: Each of the questions or incomplete statements below is followed by five
suggested answers or completions. Select the one that is best in each case and write the
correct letter of your anwer in the space provided for.

___1) During a recession, economies experience increased unemployment and a reduced

level of activity. How would a recession be likely to affect the market demand for new
cars?
A) Demand will shift to the right.
B) Demand will shift to the left.
C) Demand will not shift, but the quantity of cars sold per month will decrease.
D) Demand will not shift, but the quantity of cars sold per month will increase.
E) All of the above
___2. Unionized workers may be able to negotiate with management for higher wages
during periods of economic prosperity. Suppose that workers at automobile assembly
plants successfully negotiate a significant increase in their wage package. How would the
new wage contract be likely to affect the market supply of new cars?
A) Supply will shift to the right.
B) Supply will shift to the left.
C) Supply will not shift, but the quantity of cars produced per month will decrease.
D) Supply will not shift, but the quantity of cars produced per month will increase.
E) All of the above
___3. An increase in the demand for a good will cause
A) an increase in equilibrium price and quantity.
B) a decrease in equilibrium price and quantity.
C) an increase in equilibrium price and a decrease in equilibrium quantity.
D) a decrease in equilibrium price and an increase in equilibrium quantity.
E) None of the above
___4. An increase in the supply of a good will cause
A) an increase in equilibrium price and quantity.
B) a decrease in equilibrium price and quantity.
C) an increase in equilibrium price and a decrease in equilibrium quantity.
D) a decrease in equilibrium price and an increase in equilibrium quantity.
E) None of the above
___5. The law of demand states that the quantity of a good demanded varies
A) inversely with its price. B) directly with population.C) directly with income.
D) inversely with the price of substitute goods E) None of the above
___6. Which of the following is consistent with the law of demand?
A) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk
demanded.
B) An increase in the price of a soda causes a decrease in the quantity of soda demanded.
C) An increase in the price of a tape causes an increase in the quantity of tapes
demanded.
D) A decrease in the price of juice causes no change in the quantity of juice demanded.
E) None of the above
___7. A drop in the price of a compact disc shifts the demand curve for prerecorded
tapes leftward. Fromthat you know compact discs and prerecorded tapes are
A) normal goods. B) substitutes.C) inferior goods.D) complements. E) luxury

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___8. A substitute is a good
A) of higher quality than another good. B) that is not used in place of another good.
B) that can be used in place of another good. D) of lower quality than another good. E)
None of the above
___9. People buy more of good 1 when the price of good 2 rises. These goods are
A) normal goods.B) complements.C) substitutes.D) inferior goods. E) luxury
___10. Which of the following pairs of goods are most likely substitutes?
A) compact discs and compact disc players B) lettuce and salad dressing
B) cola and lemon lime soda D) peanut butter and gasoline E) None of tha above
___11. A complement is a good
A) used in conjunction with another good.
B) used instead of another good.
C) of lower quality than another good.
D) of higher quality than another good.
E) None of the above
___12. Suppose people buy more of good 1 when the price of good 2 falls. These goods
are A) substitutes.B) inferior.C) normal.D) complements. E. luxury
___13. A change in which of the following alters buying plans for cars but does NOT
shift the demandcurve for cars?
A) a 10 percent decrease in the price of car insurance
B) a 20 percent increase in the price of a car
C) a 5 percent increase in people's income
D) an increased preference for walking rather than driving
E) All of the above
___14. Which of the following would NOT shift the demand curve for turkey?
A) a change in tastes for turkey
B) B) a decrease in the price of ham
C) an increase in income
D) a change in the price of a turkey
E) All of the above
___15. Which of the following does NOT shift the supply curve?
A) an increase in the price of the good
B) a fall in the price of a substitute in production
C) a decrease in the wages of labor used in production of the good
D) a technological advance
E) All of the above

Activity No. 4 Demand and Supply

Name: ____________________________ Course & Section: __________________

CRITICAL THINKING QUESTIONS

1. Illustration

Managerial Economics by: Exequiel Mendoza Perez 68

1.1 Demand: For each of the fallowing cases, state how demand for the vehicle,
“HONDA SIR”, behaves, i.e., whether there is an increase or decrease in demand or in
quantity demanded.
i) The price of gasoline rises because of a shortage in the world petroleum market.
ii) A lower priced “TOYOTA REVO” enters the car market.
iii) The country is hit by another recession, causing a fall in real incomes.
iv) The government imposes a 10 per cent import levy on all imported car parts.
v) A lower rate of fatalities in accidents involving Honda Sir is observed.

1.2 Supply: Indicate whether a movement upward or downward along the supply curve,
or a shift leftward or rightward of the supply curve of MANGOES occurs for the
following cases:
i) The surge in export demand raises price.
ii) The government imposes a price ceiling on mangoes to appease consumers who
have not had enough of the fruit last year.
iii) A new variety is developed which doubles the out per tree.
iv) The current crop of mangoes is infested by fruit files.
v) The price of pesticides against fruit files increases due to the 10 percent import levy.

1.3 Describe what will happen to equilibrium price and quantity of each of the
commodities given the corresponding hypothetical situations.
i) Coffee: The Philippine Medical Association announces that caffeine in coffee
causes heart attack.
ii) National Bookstore’s Books: Management engages in a one month cut-price book
sale.
iii) Rice: Government imports rice from Thailand.
iv) Pork: Foot and mouth disease (FMD) hits thousands of pigs resulting in very high
mortality rate.
v) Cigarettes: Taxes on cigarettes are increased from P2.00 to P3.00 per pack.

Activity No. 5 Demand and Supply

Name: ____________________________ Course & Section: __________________

Critical Thinking Skills

1) Suppose the demand for gasoline is given by Qᴰ = 100 – 2P and the supply by Qˢ 20 +
6P

Managerial Economics by: Exequiel Mendoza Perez 69

i) What will be the equilibrium price and quantity for gasoline?

Comment on the Following Statements:

2) The current price of beef are 20% higher than last year’s price, but the Aggregate
consumption of the commodity was observed to have risen by 10% . The law of demand
does not apply in the case of beef.
3) After reaching its peak in December 1996, the monthly sales of Toyota Corolla had
shown a downward trend as the prices of the car were gradually raise. This reduction in
demand may be traced to changes in consumers’ taste and preferences in favor of the
Mitsubishi GLXi as evident in the sudden proliferation of this car almost everywhere.
4) Years ago ( and up to now ), PCC City has been known for its rapidy increasingn rate
of theft, armed robbery and mugging by persons addicted to drugs Since those who
craved for drugs did not earn enough money to buy sufficient quantities, they resorted to
crimes of varying degrees. Mayor HIRAP NA has been aware of the problem and he
vowed strongly that he would reduce, if not totally eliminate, these drug – related crimes.
His age – old solution: crack down on the drug traffic, arrest drug dealers and drastically
decrease the amount of drugs onthe street. Having done this, the mayor is still confused
why the drug-related crime rates are still rapidly increasing in his beloved PACC City.
5) Some people claim that without government price support programs, farmers could
farmers could not afford to grow some crops like rice: therefore, the country will not
have rice without the support programs. Is this claim correct or not? Analyze the case
with and without the support.

Tools of Analysis: Demand and Supply

The concepts of demand and supply are among the most important in all economics.
They are of course not the only tools of analysis in the economist’s armoury, but they
allow us to identify and understand the relevant factors in analyzing many economic
situations. It is assumed at this point that students already have some familiarity with
these concepts, but a brief review is in order here, so that we can then see their
application to a situation that has caused considerable controversy in recent years, the
subject of equal prize money in tennis.

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a. Demand

In the economic sense demand refers to the quantities that people are or would be
willing to buy at different prices during a given time period, assuming that other factors
affecting these quantities remain the same. For reasons explained in Chapter 3 on
demand theory, there is generally an inverse relationship between the quantity demanded
and the price charged, and this is customarily shown in the downward-sloping demand
curve, although the relationship can equally be expressed in terms of a function or
equation. The demand relationship is determined by many factors, but consumer tastes
are fundamental. This applies both to products and to the services of people in the labour
market.

b. Supply

In the economic sense supply refers to the quantities that people are or would be
willing to sell at different prices during a given time period, assuming that other factors
affecting these quantities remain the same. When talking about the supply of products it
is often the costs of production that are most important in determining the supply
relationship, and generally there is a direct relationship between the quantity supplied
and the price offered, with more being supplied the higher the price. However, in factor
markets, in particular the labour market, supply is more complex. The availability of
people with the relevant skills, the pleasantness of the work and the opportunity cost
involved are all important factors.

In order to get a further flavour of what analysis in managerial economics is all

about, it is useful to consider the next case study, where there have been a lot of views
expressed which show a lack of understanding of economic fundamentals.

Activity No. 6 Demand and Supply

Name: ____________________________ Course & Section: __________________

Case Study Analysis

Case Study : Equal Prize Money in Tennis

Managerial Economics by: Exequiel Mendoza Perez 71

A British cabinet minister has now stepped into the debate regarding equal prize money
at Wimbledon, the British Open tennis championships. Patricia Hewitt (no relation to the
men’s winner), the Trade and Industry Secretary, announced that it is ‘simply wrong’
that the winner of the men’s singles should collect £525,000, while the women’s winner
should receive only £486,000, when they had both worked equally hard. The debate
regarding prize money is not new, and has aroused some strong feelings in the last ten
years. The 1996 men’s champion, Richard Krajicek, commented in 1992 that most
women players were ‘fat, lazy pigs’ who deserved to win less. This attracted a storm of
protest from many supporters of women’s tennis, and these supporters and lobbyists have
been successful in gradually reducing the differentials in prize money. Tim Henman, the
British number one player, attracted criticism in 1999 for accusing female players of
being ‘greedy’ in demanding more prize money in ‘Grand Slam’ tournaments. The
situation in 2002 was that in the four ‘Grand Slam’ tournaments the prize money was
equal for men and women at both the US and Australian Opens, but interestingly the
women’s prize money was only half that of the men’s at the French Open.
Let us consider some of the main arguments that have been put forward both for and
against equal prize money:
FOR
1 Women have to train just as long and hard as men.
2 The ball is in play longer in women’s matches, because the game involves more rallies
and less ‘serve and volley’ tactics, according to research by the Women’s Tennis
Association.
3 Female stars are just as popular with the crowds as male players.
4 Unequal pay is an example of unfair discrimination, which in many countries is illegal.
AGAINST
1 Men have to play the best of five sets, while womenonly play the best of three.
Therefore men play longer. Research from Stirling University shows that, on this basis,
men earn less. The 1998 men’s singles champion, Pete Sampras, earned £26,270 per
hour, compared with £42,011 per hour received by the women’s champion, Jana
Novotna.
2 Competition at the top of women’s tennis is less stiff, allowing female stars to compete
in the doubles more easily, and win two prizes. The combination of singles and doubles
prizes for women would exceed the singles prize for men.
3 Male players attract bigger crowds.
4 Women are not as good as men.
The last point has also raised argument, since it is difficult to make any objective
evaluation. On a purely objective measure, the top female stars serve nearly as fast as the

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top male players, but obviously there are many other factors which make a top tennis
player apart from a fast serve. In a recent television interview John McEnroe, never one
to shy away from controversy, opined that the top female seed at Wimbledon in 2002,
Venus Williams, would only rank about number 400 in the world among male players.
Adding another dimension to the debate is sponsorship income. Anna Kournikova has
never won a major tournament; she is currently ranked number 55 in the world. Her
career total prize winnings amounted to just under £3 million at the end of 2001.
However, it is estimated that she has accumulated around £50 million in sponsorship
income, mainly from Adidas, the sportswear supplier. Although sponsorship income
tends to be directly related to the talent of the player, as reflected in computer rankings,
there are obviously other factors that are relevant.
However, one factor that is important here is that sponsorship income is determined
much more by the market forces of demand and supply than is the amount of prize
money in a tournament. The amount of tournament prize money at Wimbledon is
determined by the management committee of the All England Club. What do the public
make of all this? In a recent television poll by the BBC the viewers calling in were nearly
equally divided: 51 per cent thought the men should receive more, 49 per cent thought
prize money should be equal.
Questions
1 Do the observations by Patricia Hewitt make any sense in economic terms?
2 How relevant is hard training to determining prize money?
3 How relevant is length of playing time to determining prize money?
4 Why is sponsorship relevant to the prize money debate? Is it a good idea to relate prize
money to sponsorship?
5 Can you suggest any way of using economic forces to determine prize money? What
about having an ‘open’ championship where men play women, with no distinction
between men’s singles and women’s singles

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