Economics essay on: Demand & supply curve

The above graph shows the equilibrium level at output i.e. 101 units at price level of $18. The demand curve meets the supply curve at point A.Ans1b) A floor price refers to a limit fixed by the government i.e. the limit up to which a low price could be charged on a particular product. In order to have an effective floor price, it must be greater than the equilibrium price. In this particular question, the government sets the floor price as $20 which is equal to the equilibrium price level ($20). Since, the floor price is equal to the equilibrium price; hence, it would not have any subsequent impact on the market. The quantity of T-shirts offered by the suppliers & the quantity actually sold would remain the same. There will neither surplus nor shortage in the market since the quantity demanded would be equal to the quantity supplied (Farnham, 2009).

Ans1c) Assuming that, there will be a fall of production cost at every level due to the decline in the prices of the raw materials, there would be a surplus in the market. This means that, more number of T-shirts would be supplied by the manufacturer as compared to the quantity demanded by the customers (Farnham, 2009). If the input prices would return to normal, there would be shortage in the market.

Assuming that, there will be an increase in the number of buyers by 5%. It could be seen from the graph that when the prices of the commodity decreases there would be an increase the quantity demanded (Moyer, McGuigan & Harris, 2010). It can be seen from the graph above that, when the price was fixed at $18 the quantity demanded is 101 units, when the price of the commodity is less than $18 say $16 or $17, the quantity demanded at this price level is estimated to be 155 & 124 units (i.e. higher as compared to 101units).

Some of the reasons for an increase in the level of buyers could be as follows:

Þ    Rise in the levels of income: As there is an increase in the levels of income, the quantity demanded by the buyer increases. This means that the demand curve shifts towards the right.Þ    Change in the taste & preferences of the consumers: Another reason which might lead to an increase in the number of buyers would be due to the change in the taste & preferences (Moyer, McGuigan & Harris, 2010).

Þ    Change in the prices of the substitute goods: Change in the prices of the substitute goods also has an adverse effect over the demand of the T-Shirt demanded. If the prices of the Shirts would increase there would be an increase in the levels of quantity of t-shirts demanded (Perloff, 2008).

 Ans1b)

i)                    The market for A4 paper if there is a fall in the prices of printers.

It could be seen from the graph above that, a decrease in the price levels of printers would have an inverse relationship with the market of the A4 sized papers. As the price of the printers decreases from 1500 – 400, the market of the A4 sized sheets increases from 600 units to 900 units.

i)                    The market of solar PV panels if new technology reduces its production costs.

If the new technology would reduce its production costs, this would have an inverse relationship in the market of solar PV panels. When the production cost of the new technology would be reduced, the price charged for the same would be less as compared to the other technologies available in the market (Perloff, 2008).

ii)                  The market of music CD’s if the prices of downloading form the internet falls.

If the prices of downloading from the internet falls, the market of music CD’s would also decline. People would download the songs from the internet rather than buying individual music CD’s of the same. Downloading from the internet would be much more convenient as compared to buying the CD’s from the market.

iii)                The market for restaurant dining as the global financial crisis reduces income.

With a reduced income, the market for restaurant dinning would have an adverse affect. Due to global financial crisis, the income earned by the customers would decline & hit the leisure industry. People would prefer to dine at home rather than going out.

Ans2 a (i) MC = 8 + 6Q

MR = AR = P = 20

Profit maximizing output for this firm would be MR = MC

That is, 20 = 8 + 6Q

            12 = 6Q

            Q = 2 units

Hence, the output for this firm would be 2 units.

TC = 8Q + 3Q^2

            = 8(2) + 3 (2)^2

            = 28

TR = 20Q = 20 (2) = 40

Therefore, profit for this firm would be TR – TC = 40 – 28 = 12

Ans 2 a (ii) MC = 8 + 6Q

MR = 80 – 10Q

Therefore, profit maximizing output for this firm would be MR = MC

8 + 6Q = 80 – 10Q

16Q = 72

Q = 4.5 units

P = 80 – 5Q

   = 80 – 5 (4.5) = 57.5

Therefore, price that corresponds to the profit maximizing output = 57.5

TC = 8Q + 3Q ^ 2

= 8(4.5) + 3(4.5) ^ 2 = 96.75

TR = 8Q – 10Q ^ 2

= 8(4.5) – 10(4.5) ^ 2 = 238.5

Profit for this firm would be = TR – TC = 141.75

b) Overhead Cost = Fixed Cost = $800

Selling Price = $2.20

Cost of Labor = $800 per worker

The AC, AFC, AVC, MC curves for this particular producer would be as under:

All the curves presented in the graph above are in U Shape. This signifies that, the Marginal returns is increasing & then starts decreasing for large quantities. The MC intersects AVC at its minimum point (Perloff, 2008). All the curves presented above would help in order to provide all the information about the key operations of the organization.

C (i) Price elasticity of demand has been defined as the % change in quantity demanded divided by % change in price.

Ed =  % change in quantity demanded / % change in price

= 0.1/0.2 = 0.5

Since Ed < 1, therefore the price elasticity of demand would be Relatively Inelastic.

(ii) Price changes from $4.5 – $8

Change in price = 8 – 4.5 = $3.5

Quantity demanded = 150 units to 75 units

Change in demand = 150 – 75 = 75 units

Ed =  % change in quantity demanded / % change in price

= 1.143

Since, the Ed >1, therefore the price elasticity of demand would be Relatively Elastic.

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