Question

Consider the supply and demand for the cleaning services in your suburb for next month.

a.Draw a supply and demand diagram for the market for cleaning services in your suburb for this month with an equilibrium price of $30 per hour and equilibrium quantity 2000 hours of cleaning.

b.Illustrate and explain what happens if the price of cleaning was fixed at $20 per hour.

c.If the price was not fixed, but customers and cleaners allowed to charge whatever they like, what would happen to quantity of cleaning services demanded and supplied in the market this month.

d.If the price is not fixed and next month the incomes of households in your suburb increase,illustrate and explain the effect on demand and/or supply.What will happen to the price of cleaning and the amount of paid cleaning hours next month?

Answer 1

a.Below is a graph showing the supply and demand curves for the market for cleaning services this month. The market equilibrium price is $30 per hour and market equilibrium quantity is 2000 hours.

b If the price of cleaning was fixed at $20 per hour, there will be an excess demand of cleaning services because quantity demanded is greater than quantity supplied when prevailing price lies below the market price with an upper limit. This can also be conditioned for a shortage of cleaning services.  

c.If the price was not fixed, but customers and cleaners allowed to charge whatever they like, they would have still hovered around the equilibrium and finally settle at an equilibrium price of $30 per hour and an equilibrium quantity of 2000 hours. This is because market forces of demand and supply would have interacted and determined equilibrium through mutually beneficially exchanges.

d.If the price is not fixed and next month the incomes of households increase, there will be an increase in the demand for cleaning services. This shifts the demand curve to the right. New equilibrium price would now be higher and new equilibrium quantity will be higher as well