Question 6 : Table below represents the market demand and supply schedule

a) In the given below diagram, the X – axis shows the quantity of good and the Y-axis shows the price of the good. The price and demand combinations in the table are used to graph the downward sloping demand curve (D). The price and supply combinations in the table are used to graph the upward sloping supply curve (S).

b) The two curves intersect at equilibrium point E. The equilibrium price is $60 where quantity demanded is equal to quantity supplied which is equal to 800. Refer to the graph below.

The consumer surplus is shown by the area above the price line and below the demand curve which is the shaded area of triangle ABE. The producer surplus is shown by the area below the price line and above the supply curve which is the shaded area of triangle BCE.

c) Given that the market price ceiling is $40 which is below the market clearing price of $60, this means the price ceiling is binding. At $40, the quantity demanded is 1600 and the quantity supplied is 400. Thus, there is a shortage of 1600 – 400 = 1200.

d) If the government imposes a price ceiling of $70, the quantity supplied exceeds the quantity demanded i.e. 1000 > 400. This means the market experience a surplus of 600 units at this price ceiling.

e) If the government imposes a price floor of $30, the quantity demanded exceeds the quantity supplied i.e. 2000 > 200. This means the market experience a shortage of 1800 units at this price floor.

f) If the government imposes a price floor of $70, the quantity supplied exceeds the quantity demanded i.e. 1000 > 400. This means the market experience a surplus of 600 units at this price floor.

g) In the given below diagram, the price line at $40 shows the price ceiling. With the price ceiling, the consumer surplus is shown by the area above the price line and below the demand curve which is the area of triangle AFG. The producer surplus is shown by the area below the price line and above the supply curve which is the shaded area of triangle FCH.

h) Consumer surplus with price ceiling

Area of triangle AFG = 1/2 x Base x Height = 1/2 x FG x AF

= 1/2 x 1600 x 40

= 32000

Producer surplus with price ceiling

Area of triangle FCH = 1/2 x Base x Height = 1/2 x FH x FC

= 1/2 x 400 x 20

= 4000

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