Question

The supply and demand for bottles of Saucy Sauce are described using the following functions: Qs = = 120P - 14,400 Qd = 18,900 - 60P where: Qs = Quantity supplied (1000s of bottles per year) Qd = Quantity demanded (1000s of bottles per year) P = price per bottle (pence) a) i) Determine the equilibrium price and quantity traded ii) Sketch the supply and demand functions, clearly labelling intercepts with the axes and the equilibrium output. [5 marks] b) The government decides to impose a quota of 6,000,000 bottles per year on the firm's production in order to open up the market to other producers. i) Sketch the supply and demand functions if the quota is imposed. ii) Determine the new equilibrium price and quantity traded. iii) Explain your answer in part b)ii). [6 marks] c) In the sauce market, Saucy Sauce is one of several products consumers can choose from. Advertising, brand building and product differentiation are all carried out in this market. Discuss 3 areas of behavioural economics in the context of this market and the impact they would have on consumer decision making. [6 marks] [Total: 17 marks]

Answer 1

Given,

Qs = 120P – 14,400

Qd = 18,900 – 60P

a)

(i) Equilibrium in any market is given where Quantity Demanded equates with Quantity Supplied:

Qs = Qs

120P – 14,400 = 18,900 – 60P

120P + 60P = 18900 + 14400

180P = 33300

P = 33300/180

P = 185 Pence

Putting the value of equilibrium price in Qs or Qd equation we get equilibrium quantity Q, which is:

Qd = 18900 – 60 *185

Qd = 18900 - 11100

Qd = 7800

Or

Qs = 120P – 14,400

Qs = 120 * 185 – 14400

Qs = 22200 – 14400

Qs = 7800

Thus Qs = Qd = 7800 (1000s of Bottles per year) = Equilibrium Quantity

ii) In the given below figure 1:

X – Axis: Quantity of bottles supplied and demanded (1000s bottles per year)

Y – Axis: Price per bottle

D: Downward sloping demand curve

For X intercept: When P = 0, Q = 18900

For Y intercept: When Q = 0, P = 315

S: Upward sloping demand curve

For X intercept: When P = 0, Q = - 14400

For Y intercept: When Q = 0, P = 120

The demand and supply curve intersect at equilibrium point E with equilibrium price = 185 Pence and equilibrium quantity = 7800 (1000s bottles per year)

b) (I) Referring to the same figure( blue ink addition) :

With an imposition of the quota 0f 6000 (1000s bottles per year), the supply curve changes to KLM, which is first upward sloping from K to L and is vertical from L onwards. The new increased price is 215 Pence.

(ii) When the government imposes a quota on the firms production of 6,000,000 bottles per year then:

Qs = 6000 (1000s bottles per year)

However the demand function of the consumers remains unchanged. So equating the demand curved with the quantity supplied 6000 (1000s bottles per year) we get:

6000 = 18,900 – 60P

60P = 18900 – 6000

60P = 12900

P = 12900 / 60 = 215 Pence (Equillibrium Price)

Qd = 18900 – 60P

Qd = 18900 – 60 *215

Qd = 18900 – 12900 = 6000 (Equilibrium Quantity)

(III) When the government impose quota on the quantity supplied, given the market demand - there is a shortage of that good in the market. This is a situation of excess demand. Excess demand creates pressure on the prices to rise leading to an increased price for the goods sold in the market. In the saucy sauce market, a quota restriction on its production reduces its supply to 6000 (1000s bottles per year) which was earlier 7800 (1000s bottles per year). This leads t an increase in price from 185 Pence to 215 Pence. At the new price, there excess demand for the good which 7800 – 6000 = 2800 (1000s bottles per year). Thus there is a fall consumer surplus as now they have to pay higher prices.

PRICE ВТБ ОортА IS 915 figur 135 L Ф IK D Бодо Пgoo +1ЧИор 1gado djoook Bottles per year