Answer to Question #295828 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

a)

The quantity supplied remains constant given that the change in the price of the commodity. In this case price doesn't affect the quantity supplied which is not true under the normal circumstances.

b) If the price were at E1, the quantity demanded would fall drastically to P1 while the quantity supplied is constant. Therefore, this will force the equilibrium price to change and fit the market forces.

c) If the price were at E2, the quantity demanded would rise drastically to P2 while the quantity supplied is constant. Therefore, this will force the equilibrium price to change and fit the market forces.

d)Inferior goods are those goods whose demand is inversely proportional to the consumer income that is their demand decreases as the consumer income increases whereas normal goods are goods whose demand will increase as income goes up (positive YED), an example of a normal good is organic food.