Answer to Question #178736 in Microeconomics for chloe

Question

1) What is market equilibrium ? With the aid of a diagram, explain how changes in the market conditions will affect the market equilibrium. [ 12 marks ]

2) Using supply and demand analysis explain the effect on the equilibrium price and quantity of lamb meat in country X when there is a introduction of sales tax on all meat sold. [ 7 marks ]

Answer 1

1.

Market equilibrium refer to a state in which market supply and demand balance each other and as a result prices become stable.

The changes in determinants of supply or demand or both result in a new equilibrium price and quantity.

As shown in the diagram, initial equilibrium price was "P₀" and equilibrium quantity "Q₀". The initial demand was "D₀" and initial supply was "S₀"at equilibrium "E₀". The supply decreased to D₁ and supply to S₁.This led to to a new equilibrium "E₂" with a new equilibrium price and quantity.

2.

Sales tax increase the price buyers pay and decrease the price the seller receive. It also causes the supply curve to shift inwards thereby decreasing the quantity supplied.

As shown in the above diagram, introduction of sales tax shifts the supply curve from S to S_T .The price shifts from equilibrium price P, whereby consumers will pay price P_T and buyers receive price P₂ leading to a new equilibrium.