Question

1. Graph and Identify what happens to price and quantity at the new equilibrium when the following occur: In your answer give an example of the determinant of demand or supply that caused the change. a change in demand with static supply - What caused the change? a change in supply with static demand. What caused the change? a decrease in supply with a smaller increase in demand. What caused the changes? an increase in supply and an increase in demand. What caused the change in demand? Price Controls:\ What is a 'black market What are the drawbacks of such a market and can they be prevented give a real world example of this type of market Graph a Price floor - label all curves and each axis. what are the benefits of imposing a price floor? What are the negative aspects of a price floor? give an example Graph a Price ceiling - label all curves and each axis. what are the benefits of imposing a price ceiling? What are the negative aspects of a price ceiling give an example

Answer 1

a) A change in demand occurs when demand changes due to change in factors other than the price of good itself. Change in the income of consumer, change in taste and preference, change in price of related goods, etc causes change in demand.

Increase in demand shifts demand curve rightwards and causes increases equilibrium price and quantity.

Decrease in demand shifts demand curve leftwards and causes decrease in equilibrium price and quantity.

b) A change in supply occurs when supply changes due to change in factors other than the price of good itself. Change in the expectation of seller, government policy, change in price of related goods, change in the price of inputs, etc causes change in supply.

Increase in supply shifts supply curve rightwards and causes decreases equilibrium price and increase in quantity.

Decrease in supply shifts supply curve leftward causing decrease in quantity and increase in price.

c) Decrease in supply with small increase in demand;

Equilibrium price increases and equilibrium quantity falls.

d) an increase in supply and an increase in demand;

Increase in demand occurs due to increase in income of consumer, fall in the price of complementary goods, increase in the price of substitute goods, etc.

Increase in supply occurs due to decrease in the cost of production, decrease in taxation, increase in subsidy, etc.

e) Price control/Price Ceiling: When government fixed price of a product at a level lower than the equilibrium price, the price is called control price or price control by the government. This is done to control the interest of the consumers. The implication or consequence of price control are as follows:

a) Rationing: It is a system of distributing essential goods in limited quantities at control prices. It is reported when due to a shortage, a certain good is not available at reasonable price. Government establishes Public Distribution System as a tool to help the consumers.

b) Black market: Another result of price control can be an emergence of a black market in which the commodity is sold at a price higher than the government's fixed price. The reason is that on the one side, sellers are not ready to sell at a lower price fixed by the government and on the other side, some consumers are ready to offer a higher price to satisfy their demand for a commodity. A black market is that market situation in which goods are sold at prices higher than the price fixed by the government by law.