Question

1. Given the schedules #1 and #2 shown below:
A. plot, draw, label supply and demand curves and estimate Pe and Qe.
B. if the government sets a price floor for this product at $8, what will the result be? Illustrate the price floor on your graph and describe the result as precisely as possible.
C. if the government reverses itself and places a price ceiling on this product at $4, show the price ceiling on your graph and precisely describe the result.
D. if Schedule #2 shifts to Schedule #3, what will the equilibrium values for Pe and Qe become? What could have caused such a shift?

Schedule #1		Schedule #2		Schedule #3
Price	Quantity	Price	Quantity	Price	Quantity
$10.00	100	$10.00	0	$10.00	20
$8.00	80	$8.00	20	$8.00	40
$6.00	60	$6.00	40	$6.00	60
$4.00	40	$4.00	60	$4.00	80
$2.00	20	$2.00	80	$2.00	100

2. A. Define “demand” as an economist would.
B. List and explain three (3) non-price determinants of demand that can shift the demand curve.
C. Explain the difference between “a change in demand” and “a change in quantity demanded.” Use of a graph is encouraged but not required.

3.

A. Identify two (2) functions of price in the market economy.
B. Explain how price is determined in the market economy.
C. What are the possible results if the government interferes with the price level that the free market has determined? Explain how those results could occur and illustrate with an appropriate supply and demand graph.

Answer 1

Q1)

A) Schedule 1 is a supply schedule as it shows positive relationship between price and quantity that is as price keeps on decreasing, quantity supplied also keeps on decreasing.

Schedule 1 is a demand schedule as it shows negative or inverse relationship between price and quantity that is as price keeps on decreasing, quantity demanded keeps on increasing.

Equilibrium price and quantity is determined at the point where demand and supply curves intersect each other which means that equilibrium price is 5 and equilibrium quantity is 50 which is shown by point E₁ on the graph.

B) If government sets the price floor at 8, then quantity supplied exceeds the quantity demanded. Price floor is the minimum price fixed by the government for a product. As can be seen from the graph, at price floor of 8, quantity supplied is 80 whereas quantity demanded is 20. Quantity supplied exceeds quantity demanded and there is excess supply.

C) If the government sets the price ceiling of 4, then quantity demanded exceeds quantity supplied. Price ceiling means maximum price of a commodity that sellers can charge from the buyers. As can be seen from the graph, at price ceiling of 4, quantity demanded is 60 and quantity supplied is 40. Quantity demanded exceeds quantity supplied and there is excess demand.

D) If the demand schedule shifts from 2 to 3, the demand curve intersects the supply curve at E₂ and the new equilibrium price is 6 and equilibrium quantity is 60. This shift is caused by factors other than own price of the commodity such as income of the consumers, price of related goods, tastes and preferences of the consumers and availability of the commodity.