Answer to Question #295048 in Microeconomics for Magodi

Question

The market for wheat has the following demand and supply schedules:

PRICE (kwacha) QUANTITY DEMANDED QUANTITY SUPPIED

4 10,000 8,000

8 8,000 8,000

12 6,000 8,000

16 4,000 8,000

20 2,000 8,000

a) Graph the demand and supply curves. What is the equilibrium price and quantity in this

market? (5 Marks) What is unusual about this supply curve?[1] Why might this be true?[1]

b) If the actual price in this market were above the equilibrium price, what would drive the

market toward the equilibrium? (1 Marks)

c) If the actual price in this market were below the equilibrium price, what would drive the

market toward the equilibrium? (1 Marks)

d) Differentiate inferior good from Normal good [1 mark]

Answer 1

Solution:

a.). The demand and supply graphs are as below:

 

The equilibrium price = 8

The equilibrium quantity = 8,000 units.

 

The supply curve is unusual in that it has a vertical shape at the specific quantity supplied of 8,000 units. This means that the product has a perfectly inelastic supply curve, so the quantity supplied is the same regardless of the price. The curve highlights that any change in price does not cause a change in the quantity supplied.

 

b.). If the actual price in this market is higher than the equilibrium price of 8, the quantity supplied will exceed the quantity demanded, resulting in a surplus. As a result, suppliers will lower their prices to reduce the surplus in order to gain sales, driving the market toward equilibrium.

 

c.). If the actual price in this market were lower than the equilibrium price of 8, the quantity demanded would exceed the quantity supplied, resulting in a shortage. As a result, suppliers will raise their prices without losing sales, causing the market to return to equilibrium.

 

d.). A normal good is one whose demand rises as income rises, whereas an inferior good is one whose demand falls as income rises.

Normal goods are those whose demand rises as income rises. Food and clothing are two examples. Inferior goods are those whose demand decreases as consumer income rises. Branded products are an example.