Economic Analysis

Question 1:

The table of demand and supply schedules for chewing gum

Price

Quantity demanded

Quantity supplied

(cents per pack)

(millions of packs a week)

20

180

60

40

140

100

60

100

140

80

60

180

100

20

220

Draw a graph of the market for chewing gum. What are the equilibrium price and quantity? Mark the equilibrium price and quantity in the graph.

The price at which equilibrium is created is 50 cents per pack. The quantity demanded and supplied becomes equal at that point that is 120 million packs a week.

If price of chewing gum is 70¢ a pack. Describe the situation in the market (shortage or surplus and why?) and explain how the price adjusts.

If the price of the chewing gum becomes 70¢ a pack, then quantity demanded will be 80 million of pack a week. But the quantity supplied will be 160 million packs a week. So there will be a surplus in the market because there will be more people to supply chewing gum but there will be lesser amount of people willing to pay this much price. Thus, the supplier will reduce the price to sell their product and demand will rise substantially. Thus, bringing it to the equilibrium level again.

If the price of chewing gum is 30¢ a pack. Describe the situation in the market (shortage or surplus and why?) and explain how the price adjusts.

If the price of the chewing gum becomes 30¢ a pack, the quantity demanded will be 160 million packs a week, but the quantity supplied will be 80 million of pack a week. There will be more people willing to buy at this low price but the suppliers will not be willing to sell at this point of price. Thus, some people will be willing to pay a relatively higher price for the product eventually bringing back the equilibrium to the initial level.

If the quantity of gum supplied decreases by 40 million packs a week at each price. Explain through graph, what happens in the market.

If the quantity of gum supplied decreases by 40 million packs a week at each price, then the entire supply curve shifts to the left. It makes a new equilibrium point.

Price (cents per pack)

Quantity demanded

Quantity supplied

New Quantity Supplied

 

(millions of packs a week)

20

180

60

20

40

140

100

60

60

100

140

100

80

60

180

140

100

20

220

180

The equilibrium point will shift from 120 million packs a week for 50 cents per pack to 100 million packs a week for 60 cents per pack.

Question 2

Price

Quantity demanded

Revenue

(dollars per chip)

(millions of chips per year)

Million

200

50

10,000

250

45

11,250

300

40

12,000

350

35

12,250

400

30

12,000

What happens to total revenue if the price falls from $400 to $350 a chip and from $350 to $300 a chip?

If the price falls from $400 to $350 a chip, then the total revenue will increase from 12,000 million to 12,250 million per year. But if the price falls from $350 to $300 a chip, then the revenue will again decrease from 12,250million to 12,000 million a year.

At an average price of $350, is the demand for chips elastic, inelastic, or unit elastic? Use the total revenue test to answer this ...