(a) (i) Calculate the equilibrium price of butter in Country X.
Put the Qd on one side and the Qs on the other.
884 – 6P = 744 + 4P
Subtract 744 from both sides
(884 – 774) – 6P = (744 – 744) + 4P
Now we have 140 – 6P = 4P
Add 6P to both sides
140 (-6P + 6P) = 4P + 6P
Equals 140 = 10P
P = $14
(ii) Calculate the equilibrium quantity per month of butter in Country X.
Plug in the P of $14
Qd = 884 – 6P
Qd = 884 – (6 x 14)
Qd = 884 – 84
QD = 800
Don’t forget that it is 000kg so the answer is 800,000kg
Qs = 744 + 4P
Qs = 744 + (4 x 14)
Qs = 744 + 56
Qs = 800
Don’t forget that it is 000kg so the answer is 800,000kg
Assume that incomes in Country X increase. As a result the demand for butter increases by 10,000kg per month at each price.
(b) State the new equation for demand.
Qd = 894 – 6P
(c) (i) Assume the supply changes from
Qs = 744 + 4P to Qs = 744 + 5P
Outline how this change will affect the steepness of the supply curve.
The Supply curve will become less steep (flatter) because for any change in price, the change in Qs will be greater, hence the supply curve will become shallower/flatter.
Slope of the function increases from (+4 to +5) but the axes are reversed (the independent variable is on the vertical) the supply curve will become shallower/flatter.
(ii) Assume now that the supply changes from
Qs = 744 + 4P to Qs = 544 +4P
The supply curve will shift to the left as the Qs has decreased.
(d) (i) Define the term Price Elasticity of Supply (PES).
PES = is the responsiveness of supply (or Qs) to a change in price.
(ii) The increase in demand of 10,000kg per month (see 3 (b)) has led to a new equilibrium price of $15 and a new equilibrium quantity of 804,000 kg of butter.
Calculate the PES for butter between the original and the new market price.
Price increased from $14 to $15 = 1/14 = 7.14% increase
Qd increased from 800k to 804k = 4/800 = .5% increase
.5/7.14 = .07 (inelastic as between 0 and 1)
(e) Explain two factors that determine the PES of a product.
Time = the longer the time period, the more price elastic supply will be as firms will have more time to adjust to any change in demand/price conditions.
Excess Capacity = if it does, then increasing output will be easier so supply will be more price elastic.
Storage = the greater the ability to store stocks (goods), the more price elastic supply will be as firms can draw from stocks to increase the quantity supplied.
(f) Calculate the resulting shortage.
Using the original supply and demand functions Qd = 884 – 6P
Qs = 744 + 4P and the government set a price ceiling of $10
Using the original supply and demand functions Qd = 884 – 6P
Qs = 744 + 4P and the government set a price ceiling of $10
Qd = 884 – 6P = 884 – (6 x $10) = 884 – 60 = 824 (Qd at $10)
Qs = 744 + 4P = 744 + (4 x $10) = 744 + 40 = 784 (Qs at $10)
Shortage = Qd – Qs = 824 – 784 = 40 (000kg)
(g) Calculate the change in consumer expenditure (spending) on butter per month resulting from the imposition of the price ceiling.
Originally (before the Price Ceiling) consumers spent $11,200,000 on butter
Price x Quantity = ($14 x 800) = 11,200, 000
After the Price Ceiling consumers spent $7,840,000 on butter
Price x Quantity = $10 x 784 = 7,840,000
Change in Consumer spending = 7840 – 11200 = - 3, 360, 000 (decrease)
In essence the question is asking how much is actually bought after the price ceiling.
Understand that if it isn’t produced then it can’t be bought so we focus in on the amount Supplied,,,
With the price ceiling only 784,000 will be produced with the price ceiling but 11,200,000 would have been bought and produced without the Price Ceiling.
Price Ceilings cause Dead Weight Loss = a loss of consumer and producer surplus.
(h) Explain 2 consequences on consumers of butter if a price ceiling (max price) is imposed.
Some consumers win = now will be able to purchase butter at cheaper price
Some consumers will be worse off = unable to obtain butter as shortage
Some consumers will be worse off = forced to purchase butter a higher prices in the underground/ parallel market
