Answer to Question #146041 in Economics for Ahmed

Question

Assume Tea brands Competitor A and Competitor B are competing brands in the market. With arrival of winter season, Competitor A announces good promotional deals. Using ‘Comparative Statics Analysis’ of demand and supply model:
a. How will the managements of the two brands study the short-run and long-run impact on Tea Sales, after the announcement of promotions in the market of Tea?
b. Demonstrate and explain, with clearly labelled two panel diagrams, the ‘Rationing Function’ and the Allocating or ‘Guiding Function’ of Price.

Answer 1

a. The managements of the two brands will suppose that in the short-run Tea Sales will increase, but in the long-run Tea Sales may decrease back after the increase in prices.

b. When surpluses and shortages exist, the price adjusts to clear the market. This adjustment is the rationing function of price. Guiding or allocating function of price is the response of demand and supply in the form of movement of resources, to the changes in the equilibrium prices, in the market. It leads to the movement of resources in and out of the market.