Quiz 4: Supply and Demand: an Initial Look

Business

Videos' demand curve and quantity demand The demand curve of rental videos is downward flatter because, the demand for videos are low price elastic. When the rental cost of videos increases, the demand for rental videos will decrease. When the rental cost decreases drastically, then the demand for the videos do not increase high in response to the decrease in rental cost. The demand for videos would increase only by a small amount in response to the drastic reduction in rental cost of the videos because, normally, people watch two to three movies in a weekend.

a. Demand curve for medicine is parallel to vertical axis The demand curve is parallel to vertical axis because the demand for medicine is inelastic to the change in price. An increase in price of medicine will not reduce the demand for medicine. A patient will consume medicine to save his/her life. Hence, he/she will be ready to consume it at a higher price also. On the other hand, reduction in price will also not increase the demand for medicine. A consumer will consume medicine only to get cured from a disease. Hence, the reduction in price of medicine will not increase the consumption of medicine. Hence, the demand curve for medicine is parallel to vertical axis. b. Demand curve for French fries would be downward slopping The demand curve for French fries is downward slopping because it is highly elastic to the change in price. If the price of French fries goes up, then the consumer will consume less and go for its alternative. Hence, increase in price of French fries will reduce its demand and vice-versa. Hence, the demand curve of French fries slopes downward from left to right.

Rent ceiling Rent ceiling refers to the maximum rent fixed by the government by law for a particular region. Price ceilings are less than the market price. This is imposed by the government to stop the increasing tendency of price. a. Rent ceilings on the market for apartments When the government imposes price ceiling for rented houses, the amount of rent for the apartments is less than the equilibrium rent where the availability of rented apartment is equal to the demand for rented apartment. Since the apartment owners cannot increase the rent, the number of apartments available for rent will decrease. On the other hand, the decreasing rent amount leads to an increase in the demand for apartments. Diagram for rent ceilings on the market for apartments The below diagram illustrates the impact of rent ceiling on the market for apartments. img Diagram (1) In the above diagram, X axis measures available apartments for rent and Y axis measures the rent for the apartments. Demand curve D shows the demand for apartments and supply curve S shows the available apartments for rent at different rents. The market for rented apartment is in equilibrium where the demand curve D intersects with supply curve S at point e. At this point, rent is R. When the government imposes rent ceiling img which is less than the equilibrium rent, then the demand increases from K to L where the supply of rented apartments decreases from K to J. Hence, the rent ceiling causes J to K amount of shortage of apartments. b. A price floor in the market for wheat Price floor refers to the minimum price that is fixed by the government on any goods and services. Price floors are greater than the market price. This is imposed by the government to stop the falling tendency of price; this is also known as supporting price. When the government imposes price floors for wheat, then the price of the wheat becomes higher than the market price. To increase the price of wheat above the equilibrium price, government limits the domestic production of wheat and decreases the imports of wheat. This decreases the supply of wheat in the domestic country, which in turn increases the price of wheat. This increase in price gives benefits to the wheat producers and consumers of wheat loose since they have to pay higher prices. Diagram for price floor in the market for wheat The below diagram illustrates the impact of price floor on the market for wheat. img Diagram (2) In the above diagram, X axis measures quantity of wheat and Y axis measures price of wheat. S and img curve shows the supply of wheat and D curve shows the demand for wheat. Economy is at equilibrium at point e where demand curve D and supply curve S intersect each other. At this point, price level is P. When government imposes the price ceiling, it shifts the S curve inward to img through decreasing the output Y to img . This shifts the equilibrium from e to img .