Supply and Demand

Question 1

The market mechanism operates in such a way that any imbalance entails its automatic recovery. However, sometimes the balance is disturbed artificially through the intervention of a government. Price ceiling is the maximum limited price without further increase; it is established by a state. The conducted research shows some examples of price ceiling set as above and below the market price. To illustrate, the price ceiling set above the market price is a ceiling for wheat and maize in the United States through the provision of subsidies to farmers in order to save them from ruin and to provide them with an adequate standard of living. However, the price above the market generates a surplus of unsold goods. In the USA, the surplus of grain is bought by the federal government at the expense of the state budget and is subsequently exported (Creative Commons, 2011).

In most cases, the ceiling price is established below the market price. For instance, the government of the USA conducting social policy sets the price ceiling for certain types of food below the equilibrium price (Creative Commons, 2011). The sellers do not have right to set their own prices above it. The example may be legal maximum prices on railway tariffs, the cost of fuel and electricity, etc. The disadvantage of such intervention is that the ceiling prices are lower than the equilibrium price, which provokes the deficit of goods. This, in its turn, disrupts the market mechanism because market prices automatically remove surplus and deficiency. The advantage of such price lies in the fact that undervalued price ceiling usually halts inflation preventing the worsening of the standards of living. The shortage of stock is normally solved by artificial restriction of demand (specifically, introduction of the card system or other systems of rationing) (Creative Commons, 2011).

Question 2

The equilibrium admission price of art museum can be, for example, 100 dollars. At this price, the number of demanded visits is equal to the one offered by the museum. For instance, this number is 15 tickets. The total revenue in this case will be $ 1,500 as it equals the sum of the admission price multiplied by the number of visits. At the equilibrium price, there are no unsatisfied sellers and customers (“Law of market equilibrium,” n.d.). None of them can complain about the inability to sell or buy.

Then, the admission price of art museum becomes $ 120. Thus, the initial task suggests total revenue drop, for example, to 1200 dollars. The museum director has to know that an increase of the price enables a lot of buyers to buy a ticket. Consequently, the museum cannot sell them. In our example, 5 unsold tickets remain (1200 / 120 = 10 customers, instead of 15). Supply exceeds demand by 5 units. For the director, the only way to reverse is to lower the price because reduced prices will balance supply and demand.

Question 3

Elasticity coefficient shows the degree of quantitative changes of one factor (volume of demand or supply) in case of changing another (price, income, or expenses) by 1%. In the case under discussion, there are several types of demand elasticity for Billy. Specifically, it is elastic demand (ED> 1), or the situation where the magnitude of demand changes are disproportionally larger than the magnitude of price. For example, the growth of coffee price by 1% causes a decrease in the demand value by 4% (“Concept of elasticity,” n.d.). If Billy’s demand is inelastic (ED <1), his desire to drink coffee becomes less intense when the price grows. To illustrate, Billy’s consumption of coffee decreases by 0.3% with the increase of its price by 1% (“Concept of elasticity,” n.d.).

If Billy’s demand shows unitary elasticity (ED = 1), then each 1% change of a cup price changes the number of drunk cups by 1%. However, in the task case, Billy drinks two cups of coffee a day no matter what the price is. This is a completely inelastic demand (ED = 0), or the situation when the demand for coffee is stable even if the price changes (“Concept of elasticity,” n.d.).

Question 4

Determinants are the factors affecting demand. They include the availability of substitute products, the share of expenditure on this product in the consumer's budget, the extent of the need, the variety of use opportunities, and time to adapt to changes of price (Chand, n.d.).

To begin with, the amount of goods substitutes is directly proportional to the elasticity of demand. Secondly, the bigger the share of expenditure on this product in the consumer's budget is, the greater the elasticity becomes. If an expenditure on a particular good has a significant share in total spending, a slight change in its price can cause a relatively large change in the bugdet of the consumer. Thirdly, the extent of the need shows that the elasticity of demand is the lowest among those goods that from the point of view of the consumer, are useful for him or her. Finally, the elasticity of demand is directly connected with the variety of uses of a product (demand on universal machines is more elastic than on specialized), and it increases when this variety becomes greater. In addition, consumers need time to find alternatives for the majority of goods and change their behavior. For example, if the price of the heating material will significantly increase, consumers will pay more money in the short term and use insulating materials to reduce heat consumption in the long term period (Chand, n.d.).

The demand for orange juice is likely to be less elastic than the demand for a particular brand of orange juice (Chand, n.d.). For instance, a buyer likes a particular brand of orange juice, the price of which rose. Although any brand can be replaced with another one, the increased rates for all types of orange juice (for example, because of a poor orange harvest) force him or her to pay more or to change the beloved orange juice for the strawberry kind.