Question

Consider the annual market for imported solar panels in Australia with an upward sloping supply curve and downward sloping demand curve.

1. Draw a diagram showing the annual market for imported solar panels in Australia. Include and label the demand curve, supply curve, equilibrium price and quantity.

2. If the price was temporarily above equilibrium explain how it would return to equilibrium.

3. If the $A depreciates so that importing goods is more expensive, show and explain any changes in demand or supply and equilibrium price and quantity of imported solar panels in Australia.

4. If the price of coal fired electricity increases show and explain any changes in demand or supply and equilibrium price and quantity for imported solar panels in Australia. State any assumptions you are making about the relationship between coal fired electricity and solar panels.

Answer 1

The supply, demand, and equilibrium price and quantity can be shown as below

The point of intersection of the supply and demand curve is the equilibrium point where the equilibrium price is $5 and the Quantity is 5 units

b. If the price is above equilibrium, (let's say 7), then we see that as per the demand curve, the quantity demanded would 3. Also, as per the supply curve, the quantity supplied would be 7. So, there would be residual quantity in the market. Now the sellers, to clear the market would be willing to accept a lower price. Simultaneously, as the demand is less, they would cut production. As the price goes down, the demand for the goods also increases as per the demand curve. When the price reached $5, the demand touches 5 again and the producers also have cut back production to 5. Thus the market clears. So the price comes back to equilibrium

c. If the $A depreciates, the cost of the solar panels go up. Let us assume that the cost goes up by $A2. Thus the supply curve moves up. So the new market can be depicted by the below graph.

So now the equilibrium quantity is 4 and the equilibrium price is $A6.

So we see that due to depreciation of the $A, there is a reduction in quantity demanded from 5 to 4 and there is a rise in price from $A5 to $A6.

d. Now if the price of coal fired electricity increases, the price of solar panels relatively goes down. Also, people would want to shift from coal to solar power now. As a result, the demand for the solar panels increases. This causes the demand curve to shift to the right, i.e. at the same price, the demand is now more. The modified market can be shown as below.

So we see that there is an increased demand of 6 units up from 5 units earlier. As a result the price has also gone up to $A6.

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