Question

a. Before, lockdown due to COVID-19, the market for Mobile phones and Headphones in Karachi are at equilibrium with an equilibrium price of Rs. 50,000 and equilibrium quantity of 20,000 in the mobile phone market, and equilibrium price of Rs.1500 and equilibrium quantity of 12,000 in Headphone market. After the reopening the markets, and business in Karachi, the price of cell phones has increased from Rs.50, 000 to Rs. 70,000. What will be the impact of the increase in the price of cell phones in both the markets? Explain by using graphs. Draw the graphs for both the markets separately, labeling everything clearly. (2 Marks, 50-150 words)

Consider a market for ice cream a normal good in Pakistan. You are supposed to analyze and discuss the effect on the equilibrium output and the price in the ice cream market in Pakistan for May, 2020 after the following changes (Other things held constant). In each case, explain your answer using supply and demand diagram. (4 Marks, 50-250 words) There has been a decrease in people’s income and a rise in the price of sugar (an input for making ice cream) in Pakistan during 2020 due to COVID-19 crisis simultaneously. News reports on May 5, 2020 claim that the consumption of ice cream is good for the health of patients with coronavirus. An improvement in technology that allows ice cream to be built at half the cost in Pakistan during 2020. The weather has changed suddenly and the temperature reached 40 °C in May 2020 in Pakistan

Answer 1

A. Mobile phone and headphone markets

The mobile phone markets and head phone markets are complementary goods market... Because when we purchase a new cellphone, we should buy one headheadphone for more clarity... Here the price of cell phones increased to 70k. As a result, the supply of the phone is greater than the demand for the mobile or cell phone... A B shows the excess supply of the mobile phones. On the other hand the price of the headphones will come down. It shows in the above figure. FG shows the excess demand for headphones... There is lack of supply of head phones in the reopening of markets after lock down... Usually headphones are uusing for both laptop and mobile phones. Here the price of phones increses rapidly so that the demand for phones come down consequently the price of headphones also goes down.....

B. Ice cream market in Pakistan

In the case of ice-cream, the price of related goods and income affect the demand and supply of the ice cream market.... If the sugar price increases( input cost also increases) leads to an increase in the price of ice cream.. At the same time income of the people decreases simultaneously . The effect of these changes in the ice-cream market can be shown in the following figure.

In the above figure, E is the initial equilibrium where the D & S are inteintersected with each other. When the price of related goods( sugar) increases, the cost of production of the firm also increases . The supply curve shifts to the left so the the price goes up to P1 and new equilibrium point is established at E1 where they can sold Q1 quantity. But at the same time the income people decreases. Hence the demand curve shifts to the left and reached another equilibrium point E2. where the ice-cream sale is possible at the initial price level P and output Q2.

The technological change will reduce the cost of production and shift the supply curve to the right. And the ice-cream consumption increases due to climate change and news report. As a result the demand curve shifts to the right and new equilibrium firmed at E3 where the price is P2 and output is Q3.