TUTORIAL 2 Divide class into 5 groups. Each group attempt one question 60 minutes given to organize the groupings and for the groups to prepare the answers 15 minutes for each group to present their answers (75 mins)

Tut. Questions: State the law of demand and explain why the other-things-equal assumption is critical to it. Differentiate between a normal (superior) and an inferior good. Explain how the prices of related goods also affect demand. Evaluate how the following situations will affect the demand curve for iPods. Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year. Efforts of music artists wanting greater protection of their music result in more stringent enforcement of copyrights and the shutdown of numerous illegal downloading sites. Believing that it has significant control of the market for portable digital music players, Apple decides to raise the price of iPods with the goal of increasing profits. The price of movie tickets decreases. What effect should each of the following have on the demand for gasoline in a competitive market? State what happens to demand. Explain your reasoning in each case and relate it to a demand determinant. an increase in the number of cars the economy moves into a recession an increase in the price of car insurance, taxes, maintenance consumer expectations of substantial price increases in gasoline

State the law of demand and explain why the other-things-equal assumption is critical to it. The law states that, other things being equal, as price increases, the corresponding quantity demanded falls. There is an inverse relationship between price and quantity demanded with everything else held constant.

Cont… The other-things-equal assumption refers to constant prices of related goods, income, tastes, and other things that affect demand besides price. The law of demand only looks at the relationship between price and quantity demanded.

Differentiate between a normal (superior) and an inferior good. A normal (superior) good is one whose demand varies directly with income as is true for most goods and services the more income one earns, the more one is willing and able to buy.

However, there are exceptions, called inferior goods, whose demand varies inversely with income. Inferior goods are those whose demand increases when incomes fall and vice versa.

Explain how the prices of related goods also affect demand. Substitute goods are those that can be used in place of each other. The price of the substitute and demand for the other good are directly related. If the price of Coke rises, demand for Pepsi should increase.

Complementary goods are those that are used together like tennis balls and rackets. When goods are complements, there is an inverse relationship between the price of one and the demand for the other.

Some goods are not related to each other and are independent goods Some goods are not related to each other and are independent goods. In these cases, a change in price of one will not affect the demand for the other.

Evaluate how the following situations will affect the demand curve for iPods. (a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year. Since 18–25-year-olds are the main users of portable digital music players, this will increase the demand for iPods (assuming iPods are a normal good). This will cause the demand curve to shift outward.

(b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement of copyrights and the shutdown of numerous illegal downloading sites. These efforts raise the price of MP3s for music users that used to get their music for free from downloading services because they are now forced to purchase music through legal downloading sites. Since MP3s are a complementary good to iPods, the demand for iPods will decrease as a result of the artists’ lobbying efforts.

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(c) Believing that it has significant control of the market for portable digital music players, Apple decides to raise the price of iPods with the goal of increasing profits. A raise in price will not shift the demand curve for iPods. Rather, the higher price will simply discourage some consumers from purchasing one and demand for iPods will decrease along the demand curve to a lower quantity at the new price.

(d) The price of movie tickets decreases. Since movie tickets are unrelated to iPods, the decrease in the price of movie tickets will have no effect on the demand for iPods and the demand curve will remain the same.

(a) an increase in the number of cars What effect should each of the following have on the demand for gasoline in a competitive market? State what happens to demand. Explain your reasoning in each case and relate it to a demand determinant. (a) an increase in the number of cars Demand would increase because there would be more buyers of gasoline. The additional buyers would come from the additional cars and trucks

(b) the economy moves into a recession Demand would decrease because consumer and business incomes would fall. Consumer and businesses would have less money to spend on gasoline.

(c) an increase in the price of car insurance, taxes, maintenance Demand would decrease because of increase in the price of complementary goods. Car insurance, car taxes, and car maintenance expenses are complements to gasoline.

(d) consumer expectations of substantial price increases in gasoline Current demand for gasoline would increase because consumer expectations about the future have changed and may prompt consumers to “buy now” to beat the future price increases.