Assignment No: 4

ANSWERS:

1-a) C) supply curve S3.

1-b) D) S2 to S3.

1-c) A) Point B to Point C along supply curve S2.

1-d) C) supply curve S1.

1-e) D) decrease in the demand for pizza.

2-a) D) an excess demand of 150 million pounds of burritos.

2-b) D) an excess supply of 200 million pounds of burritos.

Q3) Economists usually think of persistent shortages being caused by some interference
with the market mechanism. Ask the class if they can think of free markets that experience
shortages. There are numerous examples, but one that most will understand is tickets to a
hot concert. These tickets are often priced below equilibrium. One reason is to create
“buzz” about the event. Some bands claim they keep ticket prices low to be fair to their
fans. Ask the class who gains and who loses when the price is set below equilibrium. This
can lead to a discussion of the value different people place on their time.

A) Using the theory of consumer surplus, we can say that it is the consumers (the buyers) who
gain and the producers (sellers) who lose when the price is set below the equilibrium. This is
explained with the aid of a diagram below.
The consumer surplus is always represented by the area identified by the triangle of the area
above the market price line (in this case, the market price is $3 per unit) and under the demand
curve. What it means is that for any quantity that corresponds with a point on the demand curve
at a given market price, bought up to that quantity, consumers (buyers) are able to buy the goods
at a lower price than the reserve price that they would have been prepared to pay. In simple
English, consumers experience value for money by paying less than they would have been
prepared to pay for a particular quantity of a good.

In the diagram given, the consumer surplus is the total value of the area identified by the blue
triangle above the equilibrium price line and under the Demand curve, so it is the triangle $3-$6-
E marked in the diagram.
The producer surplus is equal to the area that lies below the price line and above the supply
curve. The supply curve represents the minimum price that a producer would sell a particular
quantity of output for. For any quantity sold up to the equilibrium quantity (where the demand
curve and supply curve intersect), the producer would be selling each unit at a higher price than
the minimum amount as indicated by the supply curve. 

In the diagram given, the producer surplus is the total value of the area identified by the triangle
below the equilibrium price line and above the supply curve, so it is the triangle $0-$3-E marked
in the diagram.

To illustrate the point that it is the consumers (the buyers) who gain and the producers (sellers)
who lose when the price is set below the equilibrium, draw a horizontal line at the price of $2.
You will see that the triangle above the line (consumer surplus) is now larger than before, while
the producer surplus (the triangle below the line) is smaller than before.

Question: Name two other industries or markets where shortages appear to be created for
publicity and marketing purposes.

Answer:

1)
In the real estate market, developers will often release new units in phases. Typically, within a
short time they will declare "Phase one already sold out!", or "Only 7 units left in Phase 2"; this
is to create the impression that there is excess demand (market shortage) which will drive up the
price of the units.

(2)
With popular sports events, particularly those featuring top-ranked teams or national teams, the
promoters will advertise well ahead of time that tickets are limited and that these will only be
sold during a particular 'time window' on a particular date, e.g. between 08:00-12:00 on 21 May
2020. This will induce prospective customers to purchase tickets as soon as possible so that they
do not miss out on the event.