Question

Using demand and supply analysis, supported by diagrams, explain why there may be a misallocation of resources in the pricing that occurs in the primary market for ticket sales for events where demand outstrips the available supply.

Word limit - 160 words

Answer 1

Demand shows the willingness of a buyer to buy any commodity and Supply represents the behavior of the supplier in the market. Both the market forces are directed by the principles. Principle of Supply or Law of supply explains that ceteris paribus, if the price of the goods increases its quantity supplied also increases and vice-versa. This means that if a supplier gets high price of any commodity his profit increases therefore he tends to supply more units of the commodity.

In the case taken in the question, where in the primary market of the ticket sales for events where demand exceeds the available supply of the tickets. In this situation, the ticket vendor would increase the price of the tickets as the the potential customer is ready to buy the tickets at any cost as the supply of the tickets is limited. In other words, if the demand of the tickets is exceeding the supply of the tickets. It reflects that the number of potential customers is high then the vendor would increase the price of the tickets considering the high flow of potential customers of the market.

It can also be explained with the help of the below mentioned diagram.

In the above diagram it can be seen that supply of the tickets is fixed shown by "SS" supply curve and demand of the tickets is shown by "DD" demand curve. Demand and supply of the tickets are equal at point E which is the equilibrium point. At the equilibrium point E price is P and quantity is Q. With the increase in the demand of the tickets, demand increases to "DD1" and equilibrium point changes to E1. With the change in the equilibrium point Price increases to P1 but the quantity remains constant.