Tutorial 2

Review Questions

1.
Excess demand occurs when price falls below the equilibrium price. In this situation, consumer are demanding a higher quantity than is being made available by suppliers. This creates pressure for the price to increase. As the price increases, quantity demanded will fall as quantity supplied increases returning market to equilibrium.

Excess supply occurs when price is above the equilibrium price. Suppliers have made available more units than consumers are willing to purchase at the higher price. This creates pressure for the price to decrease. As the price decreases, quantity demanded will go up while at the same time the quantity supplied will decrease, returning the market to equilibrium.


4.

When (-), it is an inelastic.


5.
Demand curve
Q = 50 - 100P

Chock price, where Q = 0
...Q = 50 - 100P
...0 = 50 - 100P
...100P = 50
...P = RM 0.50


6.
Speed boats could probably be categorized as a luxury item whereas light bulbs are more likely categorized as a necessity. For the necessity, the change in quantity demanded will be relatively small for any percentage change in price. The change in quantity demanded may be quit large, however, for a luxury item. Since the percentage change in quantity demanded is likely higher for the luxury item for any given percentage change in price, the elasticity of demand will be less (more negative).

Current situation in Malaysia:
FUEL - necessity good because fuel can't be substitute.

HOUSING LOAN - luxury good because can be substitute (can apply loan for 'rumah cost rendah' instead of loan for bungalow).


Problem questions

2.1
a)
b)
c)


2.2
a)
b)


2.3
a)
b)