Question

a) Suppose that the price of the mask is P*. Draw a graph showing the Supply and Demand of medical masks with an initial equilibrium point at P=P* and Q=Q*. Then show on the graph the drop in sales that happened in August. Explain the effect of this change on P and Q.

b) Suppose that prices were unchanged at P* although the sales dropped. What do we call this price and what is the effect of this price on the medical masks market? Show this on a new graph. (2 points)

c) What do you think should happen in order to reach equilibrium point again? State three scenarios.

Answer 1

Suppose that the price of the mask is P*. Draw a graph showing the Supply and Demand of medical masks with an initial equilibrium point at P=P* and Q=Q*. Then show on the graph the drop in sales that happened in August. Explain the effect of this change on P and Q.As the condition is given in the question that we need to identify the new equilibrium point when the demand of the product will fall or we can say the drop in sales.

Let’s see the graph below:

As we have seen in the graph the initial equilibrium level was A but when the demand of the product reduces due to any reason from Q1 to Q2 and the price of the product will also decrease from P1 to P2 so the new equilibrium level at point B will be derived.

2. Suppose that prices were unchanged at P* although the sales dropped. What do we call this price and what is the effect of this price on the medical masks market? Show this on a new graph.

So in the second condition, we will use the concept of a price floor.

First, understand what price floor is:

A price floor is the lowest legal price that can be paid in markets for goods and services, labour, or financial capital. Price floors are also called “price supports,” because they support a price by preventing it from falling below a certain level that is decided by the government. Around the world, many countries have passed laws to create agricultural price supports. Farm prices and thus farm incomes fluctuate, sometimes widely. So even if on average, farm incomes are adequate, some years they can be quite low. The purpose of price supports is to prevent these swings.

Let’s understand the concept with the help of diagram:

Wheat Prices: A Price Floor Example. The intersection of demand (D) and supply (S) would be at the equilibrium point B. However, a price floor set at P1 holds the price above B and prevents it from falling. The result of the price floor is that the quantity

Supplied Q1 exceeds the quantity demanded Qd. There is excess supply, also called a surplus. So irrespective of the demand for the product shift from one point to another point the price will remain the same in this condition.

3. What do you think should happen to reach equilibrium point again?

1. If the demand for the product will increase we will reach to that level again

2. If the supply of the product reduces, then the excess gap of supply will be removed and we will be back to the equilibrium level.

3. If the income of the consumer increases the quantity demanded will be increased again and we will reach the equilibrium point again.