Market Forces: Demands and Supply

Week 3 Chapter 2: Market Forces: Demand and Supply
For this week read Chapter 2, pages 48-68
Answer the following questions:
Question 7. On page 70
Suppose demand and supply are given by Qd = 14 –1/2P and Qs = 1/4P – 1.
a. What are the equilibrium quantity and price in this market? Show your work?
Hint:
1. Draw the demand and supply graph and label all initial points ( D0, S0, P0, E0), following the use of comparative statics given your text on pages 62-65)
2. Set demand equal to Supply and solve the values. See page 62 for a practice problem
3. Next, insert the values in the graph.

Solution: Price surplus

shortage 0

For equilibrium, set = 14-1/2P=1/4P-1 14+1=1/4P+1/2P 15=(1+2)P/4 15=3P/4 =20
To find , substitute in either demand or supply =14-1/2P =14-1/2(20) =14-10 = 4 Price

=

0

Question 8. On page 70
Use the accompanying graph on page 71 to answer these questions.
Bottom of Form
a. Suppose demand is D and Supply is S0. If a price ceiling of $6 is imposed, what are the resulting shortage and full economic price?
Here,
If price Ceiling=$6 then, there will be a shortage by $3
That is, (4 – 1)=$3
Therefore, when price Ceiling is impose to $6, customers are willing to pay a full economic price of $10.00 per Units.

b. Suppose demand is D and supply is S0. If a price floor of $12 is imposed, what is the resulting surplus? What is the cost to the government of purchasing any and unsold units?
Here,
If price floor=$12, then there will be surplus by $1.50
That is, ( 2.5 – 1)=$1.5
The cost to the government of purchasing an unsold units is $18.00
=Price Floor X Surplus
=12 X 1.50 = $18.00

c. Suppose demand is D and supply is S0 so that the