Answer to Question #98102 in Macroeconomics for Peter

Question

2. Use the graph below to answer the questions that follows














i. What is the equilibrium quantity?
ii. Suppose a minimum price control PM is impose on the commodity, calculate the surplus that will occur as a result of the policy.
iii. Suggest any two ways to reduce the surplus

Answer 1

i. What is the equilibrium quantity

Equilibrium quantity is when there is no shortage or surplus of a product in the market. Supply and demand intersect, meaning the amount of an item that consumers want to buy is equal to the amount being supplied by its producers.

ii. Suppose a minimum price control PM is impose on the commodity, calculate the surplus that will occur as a result of the policy. 

Consumer surplus is the gap between the price that consumers are willing to pay—based on their preferences—and the market equilibrium price. Producer surplus is the gap between the price for which producers are willing to sell a product—based on their costs—and the market equilibrium price.

iii. Suggest any two ways to reduce the surplus

1. Increase Demand - Marketing, advertising, promotions. Get more people to buy.
2. Decrease Supply - Shift or stop production. The value (profit margin) has decreased, so target a market with better margins.