Consider the following demand function: 5P=-Q+46 and the following supply function: 4P=Q+8.
(a) What is the equilibrium price and quantity? (15 marks)
The equilibrium price is where the goods and services demanded by a customer are equal to the amount of goods or services supplied by the manufacturer.
5p= Q + 46 4p= Q +8
4P= Q + 8
24= Q + 8
24 – 8 = Q
(b) Suppose that the demand function shifts to right such that the new demand equation now becomes: 5P=-Q+55. What is the new equilibrium price and quantity? (15 marks)
5p= Q + 55 4p = Q + 8
9P = 63
4p= Q + 8
28= Q + 8
28 – 8 = Q
(c) Discuss possible factors of such a change in demand function. (5 marks)
There are many factors beyond price that could cause changes in demand. The four main ones which can directly cause changes are:
Price expectation – this would affect demand because if customers feel that the price of a product is about to drop soon, they will wait and buy the product at later date for a lower price whereas if they felt the price is going to rise they would buy the product now instead of waiting and risk paying more. An example of this could be a house as the prices of houses are always changing.
Taste and preference – if there are many consumers who are picky about the types and styles of products they consume, producers have to predict these trends and adapt production to them which is extremely difficult for the producers as products which are popular one year may not be as popular the next year.
Consumer income – an increase of the consumer’s income will commonly lead to an increase in the demand of goods whereas if the consumer’s income decreases it will have the opposite effect.
Price substitutes and complements – if there was an increase in the price of a substitute product it would result in the demand also increasing. Also if the price of a complement increased it would result in the demand for the product decrease.
(d) Discuss possible factors that would cause the supply function to move to the right. (5 marks)
There are many factors that would cause the supply function to move to the right including prices of inputs, technology, government regulations, number of substitutes available etc. Another factor that may cause the supply function to move to the right could be the number of firms in the market. An example of this could be if a firm was supplying a product which has low entry barriers and was making a profit this would result in other firms entering this market which would increase the amount supplied at all prices resulting in the supply function to move to the right.
(e) Fill the following table (30 marks)
Average fixed cost
Average variable cost
Average total cost
Hint: For the computation of EACH economic magnitude (Q, FC, VC, TC, etc.) write the corresponding calculation only ONE time. After that you are not required to show all the calculations (just fill the gaps).
Q=TC/ATC (quantity = total cost ÷ average total cost) 3000÷300=10
Q=VC/AVC (quantity = variable cost ÷ average variable cost) 2500÷250=10
Q=FC/AFC (quantity = fixed cost ÷ average fixed cost) 500÷50=10
VC=TC-FC (variable cost = total cost – fixed cost)
FC=TC-VC (fixed cost = total costs – variable costs)
TC=FC+VC (total costs = fixed cost + variable cost)