Supply and demand are basic and important principles in the field of economics. Having a strong grounding in supply and demand is key to understanding more complex economic theories.

Test your knowledge with ten supply and demand practice questions that come from previously administered GRE Economics tests.

Full answers for each question are included, but try solving the question on your own first.

## Question 1

If the demand and supply curve for computers is:

D = 100 - 6P, S = 28 + 3P

Where P is the price of computers, what is the quantity of computers bought and sold at equilibrium?

Answer: We know that the equilibrium quantity will be where supply meets or equals demand. So first we'll set supply equal to demand:

100 - 6P = 28 + 3P

If we re-arrange this we get:

72 = 9P

Which simplifies to P = 8.

Now we know the equilibrium price, we can solve for the equilibrium quantity by simply substituting P = 8 into the supply or the demand equation. For instance, substitute it into the supply equation to get:

S = 28 + 3*8 = 28 + 24 = 52.

Thus, the equilibrium price is 8, and the equilibrium quantity is 52.

## Question 2

The quantity demanded of Good Z depends upon the price of Z (Pz), monthly income (Y), and the price of a related Good W (Pw). Demand for Good Z (Qz) is given by equation 1 below: Qz = 150 - 8Pz + 2Y - 15Pw

Find the demand equation for Good Z in terms of the price for Z (Pz), when Y is $50 and Pw = $6.

Answer: This is a simple substitution question. Substitute those two values into our demand equation:

Qz = 150 - 8Pz + 2Y - 15Pw

Qz = 150 - 8Pz + 2*50 - 15*6

Qz = 150 - 8Pz + 100 - 90

Simplifying gives us:

Qz = 160 - 8Pz

This is the final answer.

## Question 3

Beef supplies are sharply reduced because of drought in the beef-raising states, and consumers turn to pork as a substitute for beef. How would you illustrate this change in the beef market in supply-and-demand terms?

Answer: The supply curve for beef should shift leftward (or upward), to reflect the drought. This causes the price of beef to rise, and the quantity consumed to decrease.

We would not move the demand curve here. The decrease in quantity demanded is due to the price of beef rising, creating the shift of the supply curve.

## Question 4

In December, the price of Christmas trees rises and the number of trees sold also rises. Is this a violation of the law of demand?

Answer: No. This is not simply a move along the demand curve. In December, demand for Christmas trees rises, causing the curve to shift to the right. This allows both the price of Christmas trees and the quantity sold of Christmas trees to rise.

## Question 5

A firm charges $800 for its unique word processor. If total revenue is $56,000 in July, how many word processors were sold that month?

Answer: This is a very simple algebra question. We know that Total Revenue = Price*Quantity.

By re-arranging, we have Quantity = Total Revenue / Price

Q = 56,000/800 = 70

Thus the company sold 70 word processors in July.

## Question 6

Find the slope of an assumed linear demand curve for theater tickets, when persons purchase 1,000 at $5.00 per ticket and 200 at $15.00 per ticket.

Answer: The slope of a linear demand curve is simply:

Change in Price / Change in Quantity

So when the price changes from $5.00 to $15.00, the quantity changes from 1,000 to 200. This gives us:

15 - 5 / 200 - 1000

10 / -800

-1/80

Thus the slope of the demand curve is given by -1/80.

## Question 7

Given the following data:

WIDGETS P = 80 - Q (Demand)

P = 20 + 2Q (Supply)

Given the above demand and supply equations for widgets, find the equilibrium price and quantity.

Answer: To find the equilibrium quantity, simply set both of these equations equal to each other.

80 - Q = 20 + 2Q

60 = 3Q

Q = 20

Thus our equilibrium quantity is 20. To find the equilibrium price, simply substitute Q = 20 into one of the equations. We will substitute it into the demand equation:

P = 80 - Q

P = 80 - 20

P = 60

Thus, our equilibrium quantity is 20 and our equilibrium price is 60.

## Question 8

Given the following data:

WIDGETS P = 80 - Q (Demand)

P = 20 + 2Q (Supply)

Now suppliers must pay a tax of $6 per unit. Find the new equilibrium price-inclusive price and quantity.

Answer: Now suppliers do not get the full price when they make a sale — they get $6 less. This changes our supply curve to P - 6 = 20 + 2Q (Supply)

P = 26 + 2Q (Supply)

To find the equilibrium price, set the demand and supply equations equal to each other:

80 - Q = 26 + 2Q

54 = 3Q

Q = 18

Thus, our equilibrium quantity is 18. To find our equilibrium (tax inclusive) price, we substitute our equilibrium quantity into one of our equations. I'll substitute it into our demand equation:

P = 80 - Q

P = 80 - 18

P = 62

Thus the equilibrium quantity is 18, the equilibrium price (with tax) is $62, and the equilibrium price without tax is $56 (62-6).

## Question 9

Given the following data:

WIDGETS P = 80 - Q (Demand)

P = 20 + 2Q (Supply)

We saw in the last question the equilibrium quantity will now be 18 (instead of 20) and the equilibrium price is now 62 (instead of 20). Which of the following statements is true:

(a) Tax revenue will equal $108

(b) Price increases by $4

(c) Quantity decreases by 4 units

(d) Consumers pay $70

(e) Producers pay $36

Answer: It's easy to show that most of these are wrong:

(b) Is wrong since the price increases by $2.

(c) Is wrong since quantity decreases by 2 units.

(d) Is wrong since consumers pay $62.

(e) Doesn't look like it can be right. What does it mean that "producers pay $36?" In what? Taxes? Lost sales?

The (a) answer says tax revenue will equal $108. We know that there are 18 units sold and the revenue to the government is $6 a unit. 18 * $6 = $108. Thus we can conclude that (a) is the correct answer.

## Question 10

Which of the following factors will cause the demand curve for labor to shift to the right?

(a) the demand for the product by labor declines.

(b) the prices of substitute inputs fall.

(c) the productivity of labor increases.

(d) the wage rate declines.

(e) None of the above.

Answer: A shift to the right of the demand curve for labor means that the demand for labor as increased at every wage rate. We will examine (a) through (d) to see if any of these would cause the demand for labor to rise.

(a) If the demand for the product produced by labor declines, then the demand for labor should decline. So this doesn't work.

(b) If the prices of substitute inputs fall, then you would expect companies to switch from labor to substitute inputs. Thus the demand for labor should fall. So this doesn't work.

(c) If the productivity of labor increases, then employers will demand more labor. So this one *does* work!

(d) The wage rate declining causes a change in *quantity demanded,* not *demand*. So this doesn't work.

Thus, the correct answer is (c).