AF3625 Engineering Economics

Presentation (Group 1)
Tutorial Questions Analysis (1.1, 2.1 & 2.2)
Presented by: Hung Ka Chun, Tony (18000433D)
Li Yat Kai, Ken (18093684D)
Wu Kwan Yu, Kent (18023675D)
Chan Renmao, Cano (18084461D)
Question
1.1
 Q1.1(a)
3
In Country A, the most popular crab-fishing months occur
between October and January. During these months, the
demand for crab is relatively high and the crab fishermen are
able to sell their crab catches for about $3 per kg. However,
during February to September, when the demand for crab is
relatively low, the crab fishermen are able to sell their crab
catches for about $4 per kg. Does this violate the law of
demand? Use a demand and supply diagram to explain your
answer.
 Q1.1(a) (Simplify)
4 • In Oct to Jan
• Demand of crab is
relatively high
• Fishermen are able to
sell their crab for $3/kg
Crab-Fishing Months
• In Feb to Sep
• Demand of crab is
relatively low
• Fishermen are able to
sell their crab for $4/kg
Question 1.1(a) Analysis

5
 Think about it
6
• In the most popular crab-fishing months
• Demand of crab is high
• Suppose the price will rise
• Why the price does not rise but fall?
 •• Think about it
•
7
Most popular crab-fishing months

• High demand of crab

• High supply of crab (simultaneously)

• Supply > Demand

• Supply curve shift more than demand curve

• Price fall
Concept related: A Change in Both Demand and Supply (Self-study note U2 p.6)
 Q1.1(a) Analysis
8
• Oct to Jan (Most popular crab-fishing months)

• High supply of crab

• High demand of crab

• Increase in supply of crab > increase in demand of crab

• Equilibrium price of crab will drop Crab-Fishing Months

 Q1.1(a) Analysis Cont’d
9
Demand and supply of crab in Oct – Jan • Demand curve
shift right
𝑺𝟏 𝑺𝟐
• Supply curve

𝑃1
shift right
𝑃2
• 𝑃2 < 𝑃1 = $3/kg
𝐷2
𝑫𝟏 • 𝑄2 > 𝑄1
𝑄1 𝑄2
 Q1.1(a) Analysis Cont’d
10
• Feb to Sep (Not the most popular crab-fishing months)

• Low supply of crab

• Low demand of crab

• Decrease in supply of crab > decrease in demand of crab

• Equilibrium price of crab will rise

 Q1.1(a) Analysis Cont’d
11
Demand and supply of crab in Feb – Sep • Demand curve
𝑺𝟐
shift left
𝑺𝟏
• Supply curve
𝑃2 shift left
𝑃1
• 𝑃2 > 𝑃1 = $4/kg

𝐷2 𝑫𝟏 • 𝑄2 < 𝑄1
𝑄2 𝑄1
 Q1.1(a) Analysis Cont’d
12
Oct to Jan
• The drop in price ($3/kg)
• Caused by the larger increase in supply than increase in
demand
• Price will drop
Feb to Sep
• The rise of price ($4/kg)
• Caused by the larger drop in supply than the drop in
demand
• Price will rise
 Think about it
13

Affect market price and quantity demand

• Demand
• Supply
Does this violate
the law of demand?

14
 “
The Law of Demand

Other things being equal, the

higher the price of a good, the
less of the good demanded,
and vice versa.

15
 Law of demand
Q1.1(a) Answer A change ( or ) in price
16
will cause a change ( or
• Not violate ) in quantity demanded.

• Law of demand (Not move along the demand curve)

• Shift in demand curve and supply curve
• Price decrease
• Increase in supply > increase in demand (Peak season)
• Demand increase (NOT QUANTITY DEMAND)
• The most popular crab-fishing months
Demand and supply of crab in Oct – Jan

𝑺𝟏 𝑺𝟐

𝑃1 Law of demand does not violate in this situation

𝑃2
𝐷
𝑫𝟏 2
𝑄1 𝑄2
Concept related: The Law of Demand (T1 p.31 & Self-study note p.13)
 Q1.1(b)
17
Suppose each producer can produce at most one cake per
day due to limited resources.

Fill in the column of “Quantity supplied”. Explain whether

the market supply is consistent with the law of supply.
 “
Law of supply

Other things being equal, the higher

the price of a good, the more of the
good will be supplied, and vice versa.

18
 “
Reservation Price

The minimum value the seller is willing

to accept in order to sell a good.

19
 Q1.1(b) Answer
20
Reservation price Number of producers Market price Quantity supplied (per day)
◈ $80 50 $80 330

$70 60 $70 280

$60 50 $60 220

$50 40 $50 170

$40 20 $40 130

$30 10 $30 110

$20 50 $20 100

$10 50 $10 50
 Q1.1(b) Answer Cont’d
21
• Consistent

• People are willing to sell a higher price of a cake

• Law of supply

50 Producers 50 Producers 50 Producers 100 Producers

$10 $20
 Q1.1(b) Answer Cont’d
22
• Upward-sloping graph
• Consistent with the law of supply

Concept related: The Law of Supply (T1 p.44 & Self-study note U1 p.20)
Question
2.1
Q2.1
◈
Explain with a demand-supply diagram in each
of the following cases how the equilibrium
price and quantity of the good or service
specified (underlined) will change. [Hint: If there
is no equilibrium, explain what else will happen
in the market.]
 “
Equilibrium price (𝑃0 ) is the price
at which the quantity demanded
equals the quantity supplied

Equilibrium quantity (𝑄0 ) is the

quantity bought and sold at the
equilibrium price

25
 Q2.1(a)
26
If the price of PS3 and Wii fall, what will happen to the price
and quantity of Xbox games if they are determined by
market demand and supply?
 “
Substitute
X and Y are related goods and both
of them can replace each other, if
the price of X increase (due to a
decrease in the supply of Y) will
increase the demand of Y.

Price of X and demand of Y are in

direct proportion
27
 “
Complement
If X and Y are complements, X and
Y have to be used together, if the
price of X increase, the demand of Y
will decrease.

Price of X and demand of Y are in

inverse proportion
28
 Q2.1(a) Answer
29
• PS3 and Wii price drop
• Law of demand
• Price
• Demand

• PS3 and Wii and Xbox console are

substitutes
• Related goods
• PS3 and Wii price drop
• Demand of Xbox console
decrease
Concept related: Prices of related goods (T1 p.37 & Self-study note U1 p.17)
 Q2.1(a) Answer Cont’d
30
• Xbox console and Xbox games are complement
• Use at the same time
• Xbox game is useless without an Xbox console
• Demand of Xbox console decrease
• Demand of Xbox games decrease

Concept related: Prices of related goods (T1 p.37 & Self-study note U1 p.17)
 Q2.1(a) Answer Cont’d
31
• Equilibrium price
• 𝑃1 𝑃2 Demand and supply of Xbox Games 𝑺𝟏

• Equilibrium quantity
• 𝑄1 𝑄2
𝑃1
𝑃2

𝑫𝟏
𝐷2
𝑄2 𝑄1

Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)

 Q2.1(b)
32
Between 2000 and 2010, advances in PC production
technology have changed the supply of PCs sharply. In the
same period, the demand for PCs has increased, but not
as much as the change in supply.

Supply for PCs

Demand for PCs

 Q2.1(b) Answer
33

• Advance Technology
• Supply
• Supply shifts right
Demand and supply of PCs • Demand for PCs increase
• Demand
𝑺𝟏 𝑺𝟐 • Demand shifts right
• Equilibrium price decrease (𝑃1 to 𝑃2 )
• Increase in supply > increase in demand
• Equilibrium quantity increase (𝑄1 to 𝑄2 )
𝑃1
𝑃2

𝐷2
𝑫𝟏
𝑄1 𝑄2 Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)
 Q2.1(c)
34

The Hong Kong government sets the

minimum wage at $30 per hour. This wage
rate is higher than the equilibrium level in
the market of unskilled workers.
 “
Price floor: The government
requires that the market price
cannot fall below certain level
An effective price floor: Price floor
level should be above the
equilibrium

35
 Q2.1(c) Answer
36 𝑺
• Effective price floor Excess Supply

• Minimum wage > 𝑃1 $30

Minimum wage
• Price to $30 𝑃1
(price floor)

• Quantity demand
• 𝑄𝑠 > 𝑄𝑑 𝐷
• Excess Supply 𝑄𝑑 𝑄𝑠
𝑄1

 Unemployment rate increase

 Sellers may offer to reduce their price (Black market)
Persistent
 Employer more selective (High supply)
Disequilibrium
 Buyers need to pay a higher price (Losers)
 Sellers can get a higher price (Winners)

Concept related: Price floor (T2 p.21-23 & Self-study note U2 p.14-15)
 Q2.1(d)
37
The price of potatoes rises and at the same time people
become concerned that French fries can cause heart
attacks.
 Q2.1(d) Answer
38
• Potatoes price rise
• Raw material of French fries
• Cost of French fries will increase (Operation cost &
resources price)
• Supply will decrease (Shift left)
• Heart attack
• Demand of French fries will decrease (Shift left)

Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)

 Q2.1(d) Answer
39
• Change in supply
equal to change Demand and supply of French fries
in demand
𝑺𝟐
• Equilibrium price 𝑺𝟏
remains the
same 𝑃1 = 𝑃2
• Quantity demand
𝑃1 =𝑃2

decrease
𝑄1 𝑄2 𝐷2 𝑫𝟏
𝑄2 𝑄1
 Q2.1(d) Answer
40
• Change in supply Demand and supply of French fries
larger than change 𝑺𝟐
in demand 𝑺𝟏
• Equilibrium price
increase
𝑃1 𝑃2 𝑃2
𝑃1
• Quantity demand
decrease
𝑄1 𝑄2 𝐷2 𝑫𝟏
𝑄2 𝑄1
 Q2.1(d) Answer
41
• Change in supply Demand and supply of French fries
smaller than 𝑺𝟐
change in demand 𝑺𝟏
• Equilibrium price
decrease
𝑃1 𝑃2 𝑃1
• Quantity demand 𝑃2
decrease
𝑄1 𝑄2 𝐷2 𝑫𝟏
𝑄2 𝑄1
Question
2.2
43 Consider a competitive market
with the following equations of
demand (D) and supply (S).

𝑫𝟎 : P = 60 – ½ 𝑸𝒅
𝑺𝟎 : P = 20 + ½ 𝑸𝒔
 2.2
44
Given:
Market Demand (𝐷0 ) : P = 60 – ½ 𝑄𝑑
Market Supply (𝑆0 ) : P = 20 + ½ 𝑄𝑠

P = Price of the product/service

𝑄𝑑 = Quantity demanded for the product/service
𝑄𝑠 = Quantity supplied for the product/service
 Q2.2(a)
45 If this market has 1,000 consumers with identical
individual demand curve, what is the equation of the
demand curve of each of these consumers? [Hint: Denote
the quantity demanded by each consumer by 𝑞𝑑 .]

Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
 Q2.2(a) Answer
46

Quantity
demanded by
𝒒𝒅
each consumers

Quantity demanded 𝑸𝒅
 “
Market demand is formed by the
horizontal summation of
individual demand by each
consumers

47
 Q2.2(a) Answer Cont’d
48
• Market Demand (𝑫𝟎 ) : P = 60 – ½ 𝑄𝑑

• There are 1000 consumers with identical individual

demand curve Quantity demanded
• 𝑄𝑑 = 1000𝒒𝒅 by each consumers
• The individual demand curve:
P = 60 -500𝒒𝒅
Where P is the price of X and qd is quantity demandedby each
consumer
When 𝒒𝒅 equal to zero, price equal to $60

Concept related: Individual Demand to Market Demand (T1 p.33 & Self-study note U1 p.16)
 D/S curve review:
49 Algebra of the demand curve

P = a - b 𝑄𝑑
 a is the intercept along the Y-axis (the highest price
anyone would pay)
 b is the slope of the equation
 Y-intercept point increases = Demand curve shift right,
ceteris paribus
 Opposite for Supply curve
 Q2.2(b)
50
Derive the equilibrium price (𝑃0 ) and quantity (𝑄0 ) in this
market.

Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠

Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)

 “
Equilibrium price (𝑃0 ) is the price
at which the quantity demanded
equals the quantity supplied

Equilibrium quantity (𝑄0 ) is the

quantity bought and sold at the
equilibrium price

51
 Q2.2(b) Answer
52
Market Demand (𝐷0 ) :P = 60 – ½ 𝑄𝑑
Market Supply (𝑆0 ) :P = 20 + ½ 𝑄𝑠
• At equilibrium
• 𝑄0 = 𝑄𝑑 = 𝑄𝑠
• P = 𝑃0
60 – ½𝑄0 = 20 + ½𝑄0
𝑄0 = 40
Hence, 𝑃0 = 60 – ½*40 or 𝑃0 = 20 + ½*40
𝑃0 = $40
 Q2.2(b) Answer Cont’d
53
𝑆0

𝑃0 = $40
𝑄0 = 40

𝑃0

𝑄0 𝐷0
 Q2.2(c)
54
If the demand equation becomes

𝐷1 : P = 80 – ½ 𝑄𝑑

while the supply remains as 𝑆0 , derive the equilibrium price

(𝑃1 ) and quantity (𝑄1 ).

Given:
𝐷1 :P = 80 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
 Q2.2(c) Answer
55
Market Demand (𝐷1 ) :P = 80 – ½ 𝑄𝑑
Market Supply (𝑆0 ) :P = 20 + ½ 𝑄𝑠
• At equilibrium
• 𝑄1 = 𝑄𝑑 = 𝑄𝑠
• P = 𝑃1
80 – ½𝑄1 = 20 + ½𝑄1
𝑄1 = 60 (increase)
Hence, 𝑃1 = 80 – ½*60 or 𝑃1 = 20 + ½*60
𝑃1 = $50 (increase)
 Q2.2(c) Answer Cont’d
56
𝑆0
𝑃1 = $50
𝑄1 = 60

𝑃1

𝑄1 𝐷1

◈
 Q2.2(c) Answer Cont’d
57

𝑃1 = $50 𝑆0
𝑄1 = 60

𝑃1
Increase
𝑃0
𝐷1
Increase
𝑄0 𝑄1 𝐷0
 Q2.2(d)
58
If the supply equation becomes

𝑆2 : P = 40 + ½ 𝑄𝑠

while the demand remains to be 𝐷0 , derive the equilibrium

price (𝑃2 ) and quantity (𝑄2 ).

Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆2 :P = 40 + ½ 𝑄𝑠
 Q2.2(d) Answer
59
Market Demand (𝐷0 ) :P = 60 – ½ 𝑄𝑑
Market Supply (𝑆2 ) :P = 40 + ½ 𝑄𝑠
• At equilibrium
• 𝑄2 = 𝑄𝑑 = 𝑄𝑠
• P = 𝑃2
60 – ½𝑄2 = 40 + ½𝑄2
𝑄2 = 20 (decrease)
Hence, 𝑃2 = 60 – ½*20 or 𝑃2 = 40 + ½*20
𝑃2 = $50 (increase)
 Q2.2(d) Answer Cont’d
60
𝑆2

𝑃2 = $50
𝑄2 = 20

𝑃2

𝑄2 𝐷0

◈
 Q2.2(d) Answer Cont’d
61
𝑆2
𝑆0
𝑃2 = $50
𝑄2 = 20

𝑃2
Increase
𝑃0

𝐷0
𝑄2 𝑄0

◈Decrease
 Q2.2(e)
62
Based on your answers in (b), (c) and (d), explain whether
the changes in equilibrium are consistent with what you
learn in class.

What we learn is ...

 Concept: Changes in Equilibrium
63

• As demand increases, demand curve shifts to the right,

P↑

• As supply decreases, supply curve shifts to the left,

P↑
 𝑆0
𝑃1 = $50

Q2.2(e) Answer 𝑄1 = 60

𝑃1
64
•
Increase

For 2.2 (c) Demand increases 𝑃0

𝐷1

• Equilibrium price increases 𝑄0

Increase
𝐷0

• 𝑃0 increases to 𝑃1
𝑄1

• Equilibrium quantity increases

• 𝑄0 increases to 𝑄1
• When only demand curve changes,
• Both 𝑃0 and 𝑄0 change in the same direction
Consistent
Effect in demand Equilibrium Price Equilibrium Quantity

Increase

Decrease

Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)

 𝑆2
𝑆0
𝑃2 = $50

Q2.2(e) Answer Cont’d 𝑄2 = 20

𝑃2
65
•
Increase
For 2.2 (d) Supply decreases 𝑃0

• Equilibrium price increases 𝐷0

• 𝑃0 increases to 𝑃1
𝑄2 𝑄0

decrease

• Equilibrium quantity decreases

• 𝑄0 increases to 𝑄2
• When only supply curve changes,
• 𝑃0 and 𝑄0 change in the opposite
directions
Consistent
Effect in supply Equilibrium Price Equilibrium Quantity

Increase

Decrease

Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)

 Q2.2(f)
66
Based on your answer in (b), suppose the government
sets a price ceiling at $60. Is it effective or not? If the
government sets a price ceiling at $30, is it effective or
not? In the case of the effective price ceiling, derive the
size (quantity) of excess demand or excess supply.

From Q2.2(b)
𝑄0 = 40

𝑃0 = $40
 “
Price Ceiling: The government requires
that the market price must not rise above
certain level.

An effective price ceiling: Price ceiling

level should be below the equilibrium

Price ceiling < 𝑃𝑒𝑞

67
 Q2.2(f) Answer
68
• The government sets a price ceiling at $60
• $60 > 𝑃𝑒𝑞 = $40
• Higher than equilibrium 𝑆0

• Not effective

𝐷0

Concept related: Price ceiling (T2 p.18-20 & Self-study note U2 p.12-14)
 Q2.2(f) Answer Cont’d
69
• The government sets a price ceiling at $30
• $30 < 𝑃𝑒𝑞 = $40 𝑆0
• Lower than equilibrium
• Effective

𝐷0

Concept related: Price ceiling (T2 p.18-20 & Self-study note U2 p.12-14)
 “
Excess demand occurs when
𝑸𝒅 > 𝑄𝑠
Excess supply occurs when
𝑄𝑠 > 𝑸𝒅

70
 Q2.2(f) Answer Cont’d
71

Excess demand Excess demand

𝑸𝟏 𝑸𝟐

Excess demand = 𝑸𝟐 − 𝑸𝟏 = 60 – 20 = 40
Concept related: Excess demand (T2 p.18-19 & Self-study note U2 p.3-4)
 Q2.2(f) Answer Cont’d
72
Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
𝑸𝟏 𝑸𝟐
By calculation: (Price ceiling at $30)
P = 30
Demand: 30 = 60 – ½ 𝑄2
𝑄2 = 60
Supply: 30 = 20 + ½ 𝑄1
𝑄1 = 20
Excess Demand = 60 – 20 = 40
Thanks!
Any questions?

73