ECONOMIC MODELS
key concepts
Marshallian supply-demand synthesis
economic model:
assumptions
verification
equilibrium:
partial
general
ceteris paribus
optimization
normative vs. positive
value:
in use
in exchange
labor theory
marginalism
comparative statics production possibility frontier
opportunity cost
t.i.n.s.t.a.a.f.l. (popular abbreviation for there is no such thing as a
free lunch)
problems
(Numbers in brackets at the beginning of problems below refer to related examples and problems
in the text.)
PART I Introduction
1.1. [Related to text example 1.2.] Consider the following supply and demand curves:
qd = 300 20p
qs = 100 20p
Graphically. Label the equilibrium values on the graph with q* and p*.
Using the supply and demand equations. First, equate qd to qs and solve for p*.
Now substitute the value you obtained for p* into the demand equation and solve for
q*.
Check your solution by substituting the value you obtained for p* into the supply
equation and confirming that you get the same value for q*.
(iii) Using the inverse supply and demand equations. Determine q* first by equating pd to ps,
then determine p by substituting q* into the inverse demand equation, and finally check
your solution by substituting q* into the inverse supply equation.
Be sure that you understand why all of these methods yield the same solution. You will
have numerous occasions to use them in this workbook and the text. Often one method
will be much simpler than the other two.
c. Suppose that the demand curve shifts to qd = 380 20p. At any value of P, this new demand
curve is (1)_____________ units to the right of the old curve. Add the new curve to the graph,
PART I Introduction
label it D', and determine the new equilibrium values for p and q by any method you wish.
(Try all three if you had any trouble with b.)
q* = (2)_________________ p* = (3)_________________
d. Suppose that the supply curve shifts to qs = 180 + 20p. At any value of P, this new
supply curve is (1)______________ units to the right of the old curve. Add the new
curve to the graph, and label it S'. Using the original demand curve, determine the new
equilibrium values for p and q by any method you wish.
q* = (2)_________________ p* = (3)_________________
e. If you observed a price increase in a market, how would you know whether it was due
to a shift in demand or a shift in supply?
1.2. [Related to text example 1.3.] A production possibility frontier (PPF) for goods x and y is
depicted in the diagram below.
(2)__________________