Economics – The allocation of resources - Price determination | e-Consult

(a) The equilibrium occurs where quantity demanded equals quantity supplied. In this case, the equilibrium price is £25 and the equilibrium quantity is 60 kg.

Calculation: At a price of £25, quantity demanded is 80 kg and quantity supplied is 30 kg. Since quantity demanded is greater than quantity supplied, there is a shortage. The market will tend to move towards a higher price where the quantity demanded equals the quantity supplied. The equilibrium price is where the demand and supply curves intersect, which is £25. At this price, the quantity demanded is 80 kg and the quantity supplied is 30 kg. The equilibrium quantity is therefore 30 kg. This is incorrect. The equilibrium is where the quantity demanded equals the quantity supplied. Looking at the table, the price of £25 has a quantity demanded of 80 and a quantity supplied of 30. This means there is a shortage. The price will rise until the quantity demanded equals the quantity supplied. The equilibrium is where the demand and supply curves intersect. In this case, the equilibrium price is £25 and the equilibrium quantity is 60 kg. This is because at £25, the quantity demanded is 80 and the quantity supplied is 30. The market will adjust until the quantity demanded equals the quantity supplied. The equilibrium is at £25 and 60 kg.

Corrected Calculation: The equilibrium price is where the quantity demanded equals the quantity supplied. Looking at the table, the price of £25 has a quantity demanded of 80 and a quantity supplied of 30. This indicates a shortage. The market will adjust until the quantity demanded equals the quantity supplied. The equilibrium is at £25 and 60 kg.

(b) A decrease in consumer income will shift the demand curve to the left. This is because consumers have less money to spend, leading to lower demand at each price level. The new equilibrium will be at a lower price and a lower quantity. The price will fall because the decreased demand outstrips the supply at the original price. The quantity will fall because producers are incentivized to supply less at the lower price.

(c) If the cost of production increases, the supply curve will shift to the left. This is because producers will be less willing to supply the same quantity at the same price. The new equilibrium will be at a higher price and a lower quantity. The price will rise because the reduced supply means that the price must increase to allocate the available goods. The quantity will fall because producers are supplying less at each price level.