Q1 The demand and supply schedules for maize in a free market are as follows. Tonnes...

Q1

The demand and supply schedules for maize in a free market are as follows.

Tonnes demanded per week	425	500	550	600	650	675	700	725	750	800
Tonnes supplied per week	1500	1000	750	600	500	400	300	225	150	100
Price per tonne ($)	160	144	128	112	96	80	64	48	32	16

(a) What is the equilibrium price?

(b) If the maize sellers set their price at $144 per tonne, what would be the effect on maize stocks and what would be the resulting reaction of sellers?

(c) If the sellers started selling the maize at $80 per tonne, what would be the effect in this case?

(d) How can equilibrium be restored in this market?

Expert Solution

a) Quantity Supplied equals quantity demanded at a price of $112. Therefore the equilibrium price is $112.

b) the price of $144 per tonne, tonnes demanded per week is 500 while the the tonnes supplied per week is 1000. As we can see at a price of 144 dollars per ton there is excess supply in the market as a result the sellers will be left holding extra stock. To sell that extra stock salads will lower down the price. Hence the resultant reaction of sellers is that they will reduce the price.

c) if the sellers started selling the maze at $80 per tonne, tonnes supplied is equal to 400 and tonnes demanded is equal to 670. As we can see at a price of $80 there is excess demand in the market. In other words it can be said that there is shortage in the market. Here sellers would face the loss of unfulfilled demand and the level of stocks of maize they want to maintain declines.

d) in the case of excess supply, sellers will lower their prices in order to sell the excess quantity of maize. 10 equilibrium will be stored when there is an decrease in price so that demand increases and supply decreases until demand and supply both equal and the equilibrium is restored in the market

In the case of excess demand there is a competition among buyers. This will drive the price up. Increase in prices would lead to reduction in demand and increase in supply until both supply and demand equal. In the equilibrium is restored in the market.

Rahul Sunny answered 8 months ago

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