Question

Assignment Tasks:

1. Suppose the market for the Toyota Yaris in a certain area has the following demand and supply curves: Q_D = 1390 - 30 P and Q_S = - 450 + 50 P where price is for a single Prius (in thousands of dollars) and quantity is in thousands of cars sold.             [3+3=6 marks]

A.   What is the equilibrium price and quantity of Prius' in this market?

B.    Is there a surplus or shortage in this market if the price is initially $20000? How large is the surplus or shortage? Show this situation graphically. Explain how the market would move from this price to the equilibrium price.

2. Use supply and demand analysis to determine the effect on the market for each event below. Illustrate each situation graphically and indicate explicitly what happens to price and quantity in each case.                                                                  [1+1+1+2=6 marks]

A.   Suppose food services at Oman decides to reduce the price of coffee products sold. How would that affect the market for the Starbucks at the corner of Grand Mall?

B.    Due to COVID 19 consumer prefer to order home delivery of food. How would this impact on prices of home delivery services.

C.    Many people lost jobs and they travel out of the country. How this would impact the demand and supply of home rental market.

D.   How does increase in electric cars will impact on demand curve of patrol?

E.    Explain how market equilibrium changes when there is an increase only in the demand.

Answer 1

1. B. At the price of $20,000, there is a shortage of supply which is determined by the difference between quantity demand and quantity supplied which is calculated in the image attached. Since at this price there is more demand, there will be a competition among buyers to buy cars eventually leading to a rise in price. This can also be understood by a large number of buyers running to purchase a small quantity of cars. This increase in price will in turn lead to buyers to purchasing less and less on one side and induce sellers to produce more and more on the other side. This will continue till the equilibrium price is reached at point e in the diagram shown. Hence, the price will return to the equilibrium point no matter what the current price is due to forces of demand and supply.

2.A. Coffee products are an input use inproduction for Starbucks. A reduction in price of coffee will increase the profit margin of Starbucks thus inducing them to produce more. This will shift the supply curve of Starbucks rightwards, leading to fall in price and a rise in quantity sold.

B. Due to COVID-19, there is an increase in demand for order of home delivery of food, which will lead to a rightward shift in the demand curve for home delivery, thus leading to a rise in price and quantity sold.

C. If people are moving out of country, then it represents a fall in demand for rental homes leading to a leftward shift in the demand curve, which leads to a fall in price and quantity.

D. If there is an increase in number of electric cars, then the demand of petrol will fall because electric cars are essentialy a substitute of petrol-run cars. This will shift the demand curve leftwards leading to a fall in price and quantity.

E. If there is an increase in demand, it will lead to a rightward shift in the demand curve keeping the supply curve fixed. This will increase the equilibrium price and equilibrium quantity.

Graphs for all the parts are attached with the answer. Please note part 2.B,C,D,E are essentially same hence two diagrams are given for them.