Question

1. The demand and supply schedules for pop in Vancouver are as follows:

Price ($/pack of 2 bottles) Quantity demanded (thousands /week)   Quantity supplied (thousands/ week)

2 280 0
3 240 30
4 200 60
5 160 90
6 120 120
7 80 140
8 40 160
9   0 180

Quantity demanded (thousands /week)

1) With the use of a demand and supply diagram, show the market equilibrium.

b. Now suppose that a fire destroys one half of the pop producing factories. Supply decreases to one half shown in the above supply schedule. What is the new equilibrium price and quantity of pop? Show the new equilibrium in your diagram from part a).

c. Has there been a shift or a movement along the supply curve of pop in part b)?

d. As the pop factories destroyed by fire are rebuilt and gradually resume pop production, what will happen to the price of pop? The quantity of pop bought? The demand curve for pop?

2. Use your diagram from 1a) to calculate the producer and the consumer surplus at the original equilibrium.

Answer 1

1. The table is given below shows the demand and supply schedule for pop in the town of Vancouver.

Price ($/pack of two bottles)	Quantity Demanded (thousands/week)	Quantity Supplied (thousands/week)
2	280	0
3	240	30
4	200	60
5	160	90
6	120	120
7	80	140
8	40	160
9	0	180

This can also be graphically represented in the form of demand and supply curves.

The equilibrium price and quantity are determined by the intersection of the demand and supply curves. The price level where the quantity demanded, and quantity supplied are equal will be the equilibrium price. Similarly, the equilibrium level of output will be where the quantity demanded, and the quantity supplied are equal.

1. In the graph given above, the equilibrium quantity is 120 thousand per week and the equilibrium price is $6/ pack of two bottles.

2. Now, suppose a fire destroys half of the factories that were producing pop. This will cause a 50 percent decline in the supply of pop. In other words, the quantity supplied of pop will be reduced by half.

The new supply schedule will be as given below:

Price ($/pack of two bottles)	Quantity Demanded (thousands/week)	Quantity Supplied (thousands/week)
2	280	0
3	240	15
4	200	30
5	160	45
6	120	60
7	80	70
8	40	80
9	0	90

The new supply curve will be as given below:

The new equilibrium price will $7.25 and the new equilibrium quantity will be 75 thousand per week.

c. A reduction in the quantity demanded because of fire will cause the supply curve to move to the left. This leftward shift in the supply curve will cause the equilibrium quantity to decrease and equilibrium price to increase.

d.         As the factories that were destroyed in fire are rebuilt gradually. The supply of pops will be resumed. The gradual increase in the supply will shift the supply curve to the right. The rightward shift in the supply curve will cause the equilibrium quantity to increase and equilibrium price to decrease.

As the supply will be fully resumed, the supply curve will be back to its original position. At this point, the equilibrium price and the equilibrium quantity will be equal to its value initially.

2. The consumer surplus can be defined as the difference between the maximum price a consumer is willing to pay and the price it must pay in the market.

We can find the consumer surplus by calculating the area of the triangular region below the demand curve and above the equilibrium price level.

The producer surplus can be defined as the difference between the minimum price a producer is willing to accept and the price it must pay in the market. It can be found by calculating the area of the triangular region above the supply curve and below the equilibrium price level.

So, the consumer surplus is $180, and the producer surplus is $240.

Answer 2