Economics · Unit 7
Market Equilibrium and Government Intervention
Exam-focused notes for Market Equilibrium and Government Intervention (Economics, ECO155): what the TU syllabus asks and how it has actually been tested, with 6 solved past questions from this unit.
What this unit covers
- Market equilibrium definition
- Shifts in demand and supply curves effects on equilibrium
- Price floor and effects
- Price ceiling and effects
- Indirect tax effects on equilibrium
- Producer surplus concept
- Price floor effects on producer surplus
Shifts in demand and supply curves effects on equilibrium
Define market equilibrium. Explain how shifts in demand and supply curves affect equilibrium price and quantity, with appropriate diagrams.[10]
Market equilibrium is the state where the quantity of a good that consumers are willing and able to buy at a given price equals the quantity that producers are willing and able to supply at that same price. At equilibrium: - Quantity Demanded (Qd) = Quantit...
Full solved answer →Producer surplus concept
Explain the concept of producer surplus. How does a price floor affect producer surplus? Illustrate with a diagram. [5]
Producer surplus is the difference between the price at which a producer is willing to sell a good and the actual price they receive in the market. Mathematically: In aggregate terms, producer surplus represents the total benefit or gain that producers enjo...
Full solved answer →Indirect tax effects on equilibrium
Question
The market demand and supply function are given as: $Q_d = 500 - 5P$ and $Q_s = 100 + 5P$
a. Find the equilibrium price and output.
b. If the indirect tax of Rs 8 per unit is imposed by the government what will be the new equilibrium price and output? [5+0]
- Demand function: $Qd = 500 - 5P$ - Supply function: $Qs = 100 + 5P$ - Indirect tax (part b): Rs 8 per unit --- At equilibrium: $Qd = Qs$ $$500 - 5P = 100 + 5P$$ $$400 = 10P$$ $$P = 40$$ Equilibrium Price = Rs 40 per unit Substitute back: $$Q = 500 - 5(40)...
Full solved answer →Question
The market demand and supply functions for product are given below:
$$Q_d = 500 - 5P$$ $$Q_s = 100 + 5P$$
a) Find the equilibrium price and output.
b) If the sales tax (indirect tax) of Rs. 10 per unit is imposed by the government, what will be the new equilibrium price and output? [5+0]
- Demand function: $Qd = 500 - 5P$ - Supply function: $Qs = 100 + 5P$ - Sales tax (part b): Rs. 10 per unit --- At equilibrium, $Qd = Qs$: $$500 - 5P = 100 + 5P$$ $$400 = 10P$$ $$P = 40$$ Equilibrium Price = Rs. 40 per unit Quantity: $$Qd = 500 - 5(40) = 30...
Full solved answer →Price floor and effects
Discuss the government intervention in market through price floor, price ceiling and tax effect. [5]
A price floor is the minimum legal price set by the government below which a good cannot be sold. Characteristics: - Set above the equilibrium price - Creates a binding constraint on the market - Results in surplus (excess supply) - Example: Minimum wage la...
Full solved answer →Discuss the government intervention in the market through price floor, price ceiling and tax and effect. [5]
Definition: A price floor is a legally mandated minimum price below which a good cannot be sold. Effects: - Creates a binding price floor when set above equilibrium price - Results in excess supply (surplus) - quantity supplied exceeds quantity demanded - P...
Full solved answer →Make Unit 7 stick
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