Photo AI
The data below represents the market demand and the market supply schedules for the soft drink 'Quencher' - Leaving Cert Economics - Question 1 - 2010
Question 1
The data below represents the market demand and the market supply schedules for the soft drink 'Quencher'. Price € Quantity Demanded (*000 units) Quantity... show full transcript
Worked Solution & Example Answer:The data below represents the market demand and the market supply schedules for the soft drink 'Quencher' - Leaving Cert Economics - Question 1 - 2010
Step 1
Using the above data, draw the diagram showing the market demand and market supply curves for the soft drink 'Quencher'. Clearly mark the point of equilibrium and the equilibrium price and quantity.
Answer
To draw the diagram, start by plotting the given price points on the vertical axis and the quantity on the horizontal axis.
-
Plot Points:
- Plot the demand curve with points corresponding to prices of €2.00, €2.25, €2.50, €2.75, and €3.00 with their respective quantities demanded.
- Plot the supply curve with points for each price and their respective quantities supplied.
-
Draw Curves:
- Connect the points for quantity demanded to create the demand curve, which will slope downwards.
- Connect the points for quantity supplied to form the supply curve, which will slope upwards.
-
Identify Equilibrium:
- Look for the intersection where quantity demanded equals quantity supplied, marking this point and labeling it as the equilibrium price and quantity.
- In this case, at a price of €2.50, the equilibrium quantity is 20,000 units.
Step 2
Explain what it means for the market 'to be in equilibrium'.
Answer
In market equilibrium, the quantity of a good that consumers are willing to buy equals the quantity that producers are willing to sell at a given price. This balance means that there is no excess supply or demand in the market. At this point, the market forces are stable, and there is no tendency for prices to change. If the price were above the equilibrium, there would be surplus supply, prompting sellers to lower their prices. Conversely, if the price were below equilibrium, demand would exceed supply, encouraging sellers to increase prices.
Step 3
Assume costs of production fell, resulting in an extra 20,000 units supplied at each of the above listed prices. With reference to your diagram in 1(a) above and assuming that demand remains unchanged, draw the new supply curve. Clearly indicate the new point of equilibrium and new equilibrium price and quantity.
Answer
-
Adjust Supply Curve:
- Increase the quantity supplied at each price point by 20,000 units. For instance, at €2.00, the quantity supplied will become 25,000 units instead of 5,000 units.
- Re-draw the supply curve using these new points.
-
Find New Equilibrium:
- Reanalyze the intersection of the new supply curve with the original demand curve to find the new equilibrium point.
- If the new supply curve intersects the demand curve at €2.25 with a quantity of 30,000 units, mark and label this as the new equilibrium price and quantity.
-
Diagram:
- Ensure the new curve and intersection point is clearly indicated in your drawing.
Step 4
Outline four factors which affect price elasticity of demand (PED).
Answer
-
Availability of Close Substitutes:
- Goods with more substitutes tend to have more elastic demand since consumers can easily switch if prices go up.
-
Nature of the Good (Luxury vs. Necessity):
- Luxuries tend to be more elastic because consumers can forgo them if prices rise, while necessities tend to have inelastic demand.
-
Proportion of Income Spent:
- Goods that take up a larger portion of income typically have more elastic demand since price changes have a greater impact on the consumer's budget.
-
Time Period for Adjustment:
- Demand elasticity can vary over time; it is usually more elastic in the long term as consumers find substitutes or adjust their consumption habits.
Step 5
The PED for the soft drink 'Quencher' has been calculated at -3.8. Using your knowledge of PED, explain the economic meaning of this figure.
Answer
A PED of -3.8 indicates that the soft drink 'Quencher' is price elastic. This means that a 1% increase in the price of 'Quencher' will result in a 3.8% decrease in the quantity demanded. This high elasticity suggests that consumers are sensitive to price changes for this good, likely due to the availability of substitutes or because it is a luxury item rather than a necessity.