Question

Rob is an economist who also enjoys playing tennis. He has determined that the following demand/supply schedules exist for Wilson Tennis Balls in a small city:

Price (P).......................Quantity Demanded (Qd)..........................................Quantity Supplied (Qs)

$/can cans per year cans per year

7.00......................................0...............................................................................1200

6.75..................................200...............................................................................1000

6.50..................................400.................................................................................800

6.00..................................600.................................................................................600

5.50..................................800.................................................................................400

5.00.................................1000................................................................................200

4.50.................................1200..................................................................................0

Questions:

(a) Draw a diagram of the market for Wilson tennis balls in the space provided...

(b) What is the equilibrium price and quantity of Wilson tennis balls? ( 2 marks )

(c) If sporting goods stores originally sell Wilson tennis balls for $5.50 per can, what will be the condition of the market? How will the price, quantity demanded and quantity supplied adjust as a result? ( 3 marks )

(d) State the two assumptions associated with the Demand/Supply Model ( 2 marks )

(e) Explain how either the demand side of supply side for Wilson tennis balls will be affected in each case. Explain, in each case, how equilibrium price and quantity are affected... ( 2 marks each )

(i) There is a decrease in the price of Dunlop tennis balls, a substitute in consumption for Wilson tennis balls (all else equal)

(ii) There is a decrease in the price of felt, used in the production of tennis balls (all else equal)

(iii) There is an increase in the price of Wilson tennis balls, all else equal

(iv) There is a decrease in the price of tennis rackets (all else equal)

(v) Consumers expect the price of Wilson tennis balls to increase next week due to a professional tennis tournament coming to Toronto (all else equal)

Answer 1

a. Refer below for the demand and supply curves

b. From the above graph we can see the demand and supply curve intersect each other at a price of $ 6.00 and a quantity of 600.

Equilibrium price= $ 6.00

and Quantity = 600

c. When the cans are sold at a price of $ 5.50 then the market price is below the equilibrium price. As a result of it the quanity demanded would be greater than the quantity supplied that is there will be shortage in the market. Hence there will be an upward pressure on the market price.

d. In case of Demand/Supply the following assumptions are made

• An important assumption is of cetris paribus that is only the price of the good will change while others will remain constant. in other words only one factor is variable.
• The taste and preference of the consumer remains same at the time of analysis.

e. i. Due to decrease in the price of Dunlop tennis balls the demand for Wilson Tennis balls will decrease. Due to decrease in demand the quantity demanded as well as price will decrease.

ii. Due to decrease in price of felt (input) the supply of Wilson Tennis balls will increase that is the supply curve would shift to its right. Hence the price will decrease and the quantity will increase.

iii. Due to increase in price of balls the quanity demanded will decrease and the price will increase.

iv. Tennis racquets are complementary to balls thsu a reduction in price of racquets the quantity demanded of tennis balls will increase.

v. Next week the price will increase thus immediately the quantity demanded will increase and hence the price.

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