Question

Please answer question 4 to question 7.

DEMAND/SUPPLY SCHEDULE 1                    DEMAND/SUPPLY SCHEDULE 2                                                                     

Price	Qd	Qs		Qd + 200 (at each price)	Qs + 200 (at each price)
$50	200	800		400	1000
$45	300	700		500	900
$40	400	600		600	800
$35	500	500		700	700
$30	600	400		800	600
$25	700	300		900	500
$20	800	200		1000	400

4. Assume a price floor of $45 in Schedule 1; what is the result?

Assume a price ceiling of $25 in Schedule 1; what is the result?

In both cases what is the implication for resource allocation?

5. Distinguish between a change in demand/supply and change in quantity demanded/supplied

6. In Schedule 2 state four (4) reasons that would shift the demand curve.

7. What are five (5) reasons that would shift the supply curve?

Answer 1

4. Assume a price floor of $45 in Schedule 1; there is a surplus of 400 units. This is because quantity demanded is 300 units and quantity supplied is 700 units. Assume a price ceiling of $25 in Schedule 1; there is a shortage of 400 units. This is because quantity demanded is 700 units and quantity supplied is 300 units. In both cases the resource allocation is inefficient since there is a deadweight loss. The market is not clearing resulting in misallocation of resources.
5. A change in demand/supply occurs when there is a change in the factors affecting the demand / supply keeping the price of the product constant. A change in quantity demanded/supplied occurs when there is no change in the factors affecting the demand / supply but there is a change in the price of the product. There is a shift in the former while there is a movement along the curve in the latter.
6. In Schedule 2 state demand is shifting to the right, possibly because of increased consumer income, increased number of consumers, increased price of substitute or decreased price of complement

7. There is a rightward shift in the supply curve in this table which can occur when there are favourable conditions for production (such as good weather), updated technology that raises production, reduced input prices, a change in the objective of firm (when it starts diversifying), change in quantity of resources.