The following relations describe demand and supply Qd 30000

The following relations describe demand and supply.

Qd = 30,000 - 100P

Qs = -10,000 + 100P

q. Find the market clearing (equilibrium) price and quantity and show them graphically using S and D curves. A free hand graph will do as long as you identify clearly market clearing P and Q.

Following questions are designed to understand long run function of price.

r. Suppose the demand for the product in question increases, which leads to a new demand equation given below (i.e. an upward shift in demand) Qd = = 35,000 - 100P Find new market clearing price and quantity using new demand equation given above and the old supply equation. Show the result in the same graph with the market clearing price and quantity you obtained in question (q).

s. Compare the new market clearing price and quantity to the one in (q) and discuss how does market eliminate the resulting disequilibrium (surplus or shortage). Also explain how sellers (or producers) would make a short run adjustment in quantity so that new market clearing is achieved. Use short run rationing function of price again in its adjustment process.

t. Below is the new (increased) supply equation (i.e. a shift in supply). Find new market clearing price and quantity using the new supply equation below and the new demand equation in (r). QS = -5,000 + 100P Compare the new market clearing price and quantity above to that in (r) and discuss disequilibrium adjustment process in terms of long run adjustment by sellers (or producers). Incorporate long run rationing function of price.

u. Discuss the difference in the role of price played in taking care of shortage/surplus in short run in (r) v. scarcity/abundance in long run in (t).

v. Briefly explain how Wal-Mart created an upward shift in demand as in (r) by building its first Wal-Mart in a small town, Bentonville, AR, and then how did they engineer shifts (increase) in supply in (t). If you do not address the essence of what made Wal-Mart the world largest retailer in your answer, you may not get credit even though what you said might not be wrong.

Solution

q.) At Equilibrium,

Q_D = Q_S

   30000 - 100P = - 10000 + 100P

40000 = 200P

   Equibrium Price =$ 200

   Equilibrium quantity = 30000 - 100 * 200

   = 10000 Units (Demand side)

OR

Equlibrium quantity = -10000 + 100P

   = -10000 + 100 * 200

   = 10000 Units (Supply side)

Conclusion:-

r) Qd = 35,000 - 100P (New Demand equation)

Qs = -10,000 + 100P

At Equilibrium,

Q_D = Q_S

   35000 - 100P = - 10000 + 100P

45000 = 200P

   Equibrium Price =$ 225

   Equilibrium quantity = 35000 - 100 * 225

   = 12500 Units (Demand side)

OR

Equlibrium quantity = -10000 + 100P

   = -10000 + 100 * 225

   = 12500 Units (Supply side)

Conclusion:-

t) Qs = -5,000 + 100P (New supply equation)

Qd = 30,000 - 100P

At Equilibrium,

Q_D = Q_S

   30000 - 100P = - 5000 + 100P

35000 = 200P

   Equibrium Price =$ 175

   Equilibrium quantity = 30000 - 100 * 175

   = 12500 Units (Demand side)

OR

Equlibrium quantity = -5000 + 100P

   = -5000 + 100 * 175

   = 12500 Units (Supply side)

Conclusion:-