Evans Barasa

 The demand and Supply Equilibriums. Author’s Name: Institutional of Affiliation: Date Question 1. An industry structure refers to the number of participants (buyers and Sellers), technology, and the ease of entry and exists of firms. When the number of sellers is many, a single seller is said to operate under condition of perfect competition. Suppose that Burger King offers (Good X, whopper) and operates in a competitive market and uses cheese as its main input. What would happen to the supply of good X in each of the following situations? a. The price of cheese sauce increases. 1. Draw the initial market demand and supply curves for a typical competitive market. Label each curve and identify the initial points (D0, So, E0, P0 and Q0). Price (P) D0 S0 P0 E0 S0 D0 Q0 Quantity (Q) 2. Now, show which curve (demand or supply) will be affected if the input cost of cheese increases and offer an explanation of your choice. Label and show new curve (D1, or S1). An increase in the input cost will push the prices of the Cheese upwards, from P0 to P1. The supply will reduce, shifting the Supply curve to the left to from S0 to S1. The quantity demanded will decrease from Q0 to Q1 as shown below. Price (P) D1 S1 D0 S0 P1 E1 P0 E0 S1 D1 S0 D0 Q1 Q0 Quantity (Q) 3. What is the new equilibrium? The new Equilibrium Price, P1, and Quantity, Q1 create a new equilibrium at point E1. 4. Give an interpretation as to the new price (higher or lower) and the new equilibrium quantity (higher or lower). With a reduction in the supply of the cheese, demand for the same good will increase. The demand curve will shift to the right from D0 to D1. The new equilibrium, will be at point E1 b. What is an excise tax? An excise tax is a duty levied on given product, at the time of manufacturing. The charges are factored in when the product is sold to the consumers. In the essence, The burden is passed on the consumer. They are included in the product pricing of the product (Forgang & Einolf, 2015). Suppose an excise tax of $2 is imposed on Good X. Explain how this excise tax will affect the market for Whopper. The excise tax of $2 will be included in the new price of Good X (P0+$2) resulting in an increase in the price of the Good X. Good X will become more expensive. This will affect demand negatively. The demand of Good X will drop from equilibrium point Q0 to Q1. On the other hand, The price increase will also lead to a corresponding increase in supply of the Good X, from Q0 to Q2 the difference between Q2 and Q1 (Q2>Q1) will create a surplus in the market (Forgang & Einolf, 2015). Price X (P) Surplus. D0 S0 (P0+$2) X Y P0 E0 S0 D0 Q1 Q0 Q2 Good X (Q) c. What is an “ad valorem” tax? An ad Valorem tax is a levy charged by the local governments on properties and real estate investments. It is calculated as a percentage of the sales or the property value. (Forgang & Einolf, 2015) Suppose an ad valorem tax of 2 percent is imposed on good X. Since the ad-valorem tax is a percentage of the final sales price, it means that at low prices the tax will be relatively smaller (10% of $1 is just 10c), but at higher prices the tax levied will be greater (10% of $10 is $1). This illustrates why the supply curve shifts to the left and outwards as the property price increases. With P1 = (P0+2%), the corresponding demand for properties drops from Q0 to Q1. The main impact if felt at the upper section of the graph. Meaning the higher the property value the higher the Impact on the Supply, and thereby, affecting the supply curve. The Equilibrium will shift from point E0 to E1 (Forgang & Einolf, 2015). See figure below. S1 Price (P) ad-valorem tax D0 S0 P1 = (P0+2%) E1 P0 E0 S1 ad-valorem tax S0 D0 Q1 Q0 Quantity (Q) d. A technological change reduces the cost of producing additional units of good X. Technological changes generally reduce the cost of productions. That means It is cheaper to produce. This triggers an increase in supply of the produce. The supply Curve will shift to the right. Equilibrium Quantity will increase from Q0 to Q1. An increase in supply of a given product, leads to a drop in price of the Good. In this case, Equilibrium price drops from P0 to P1. The equilibrium point will shift from Pont E0 to E1. (Forgang & Einolf, 2015) Price (P) D0 S0 S1 P0 E0 P1 E1 S0 S1 D0 Q0 Q1 Quantity (Q) Question 2 The question below is about market equilibrium and how to compute equilibrium values. Suppose demand and supply are given by Qd = 15-4P and Qs = -3+2P. a. What are the equilibrium quantity and price in this market? Step One, begins by solving the demand and supply functions in terms of quantity Step two, set Qs=Qd Step 3, Solving P, by plugging P, into the Supply and demand functions, to determine the equilibrium quantity. Demonstration: At equilibrium, Qs=Qd, that is, using our Equations above, (15-4p)=(-3+2P) (15+3)=(2P+4P) 18=6P By dividing 6, in both sides, one gets, P=3 Qd=15-4(3) Qd= (15-12) Therefore giving us 3. Qs=-3+2(3) Qs=(-3+6) And therefore giving us 3 Price (P) D0 S0 3 E0 S0 D0 0 3 Quantity (Q) References Forgang, W. G., & Einolf, K. W. (2015). Management economics: an accelerated approach. Routledge.