# Demand and supply

Demand and supply

Questions

Q4.4 The Energy Department estimates that domestic demand for natural gas will grow by more than 40 percent between now and 2025. Distinguish between a demand function and a demand curve. What is the difference between a change in the quantity demanded and a shift in the demand curve?

Q4.6 The United States is a big exporter of animal feeds, corn, meat, fruits, vegetables, and other

agricultural commodities. Explain how foreign trade affects the domestic supply of such products.

Problems

P4.6 Demand Curves.
The Eastern Shuttle, Inc., is a regional airline providing shuttle service between New York and Washington, DC. An analysis of the monthly demand for service has revealed the following demand relation:
Q = 26,000–500P-250POG + 200/ß-5,000S
whereQ is quantity measured by the number of passengers per month, P is price (\$), POG is a regional price index for other consumer goods (1967 = 1.00), IB is an index of business activity, and S, a binary or dummy variable, equals 1 in summer months and 0 otherwise.
A. Determine the demand curve facing the airline during the winter month of January if POG =4 and IB = 250.
B. Determine the demand curve facing the airline, quantity demanded, and total revenues during the summer month of July if P = \$100 and all other price-related and business activity variables are as specified previously.

P4.8 Supply Curve Determination.
Olympia Natural Resources, Inc., and Yakima Lumber, Ltd., supply cut logs (raw lumber) to lumber and paper mills located in the Cascades Mountain region in the state of Washington. Each company has a different marginal cost of production, depending on its own cost of landowner access, labor and other cutting costs, the distance cut logs must be shipped, and so on. The marginal cost of producing 1 unit of output, measured as 1,000 board feet of lumber (where 1 board foot is 1 square foot of lumber, 1 inch thick), is
MCO = \$350 + \$0.00005QO (Olympia)
MCY = \$150 + \$0.0002QY (Yakima)

The wholesale market for cut logs is vigorously price competitive, and neither firm is able to charge a premium for its products. Thus, P = MR in this market.
A. Determine the supply curve for each firm. Express price as a function of quantity and quantity as a function of price. (Hint: Set P = MR = MC to find each firm’s supply curve.)
B. Calculate the quantity supplied by each firm at prices of \$325, \$350, and \$375. What is the minimum price necessary for each individual firm to supply output?
C. Assuming these two firms make up the entire industry in the local area, determine the industry supply curve when P < \$350.
D. Determine the industry supply curve when P > \$350. To check your answer, calculate quantity at an industry price of \$375 and compare your result with part B.
P4.10 Market Equilibrium.
Eye-de-ho Potatoes is a product of the Coeur d’Alene Growers’ Association. Producers in the area are able to switch back and forth between potato and wheat production, depending on market conditions. Similarly, consumers tend to regard potatoes and wheat (bread and bakery products) as substitutes. As a result, the demand and supply of Eye-de-ho Potatoes are highly sensitive to changes in both potato and wheat prices. Demand and supply functions for Eye-de-ho Potatoes are as follows:
QD = -1,450 – 25P + 12.5PW + 0.1Y Demand)
QS – – 100 + 75P – 25PW – 12.5PL + 10R (Supply)

whereP is the average wholesale price of Eye-de-ho Potatoes (\$ per bushel), PW is the average wholesale price of wheat (\$ per bushel), Y is income (GDP in \$ billions), PL is the average price of unskilled labor (\$ per hour), and R is the average annual rainfall (in inches). Both QD and QS are in millions of bushels of potatoes.
A. When quantity is expressed as a function of price, what are the Eye-de-ho Potatoes demand and supply curves if PW = \$4, Y = \$15,000 billion, PL = \$8, and R = 20 inches?
B. Calculate the surplus or shortage of Eye-de-ho Potatoes when P = \$1.50, \$2, and \$2.50.
C. Calculate the market equilibrium price-output combination. 