Draw a graph showing the demand and supply at various price levels and mark the equilibrium price and equilibrium quantity.
Equilibrium price of commodities in the market is determined by the interaction of the demand and supply curves. Equilibrium price refers to the price level whereby the amount of goods demanded is equal to the amount of goods supplied. On the other hand, equilibrium quantity refers to the amount of products sold at a particular equilibrium price. The chart below illustrates the demand and supply for fast food meals and the respective price.
|Price ($)||Quantity demanded (Meals per day)||Quantity supplied (Meals per day)|
Key: Red curve- Supply curve
Blue curve- Demand curve.
From the graph above, the equilibrium price of fast food meals is $55 while the equilibrium quantity is 75 meals.
Analyze the market situation at price level 45 and explain how the price adjusts
If the price of fast food meals is lowered to $ 45, there would be a shortage in the market. This is due to fact that the demand would increase to 80 fast food meals while the amount supplied would only be 60 fast food meals as illustrated in figure 2. This situation would lead into competition amongst the consumers resulting into restoration of the equilibrium price and quantity.
Calculate the price elasticity of demand when price of meals increase from AED 55 to AED 65 and identify its degree
Price elasticity of demand is used to determine how the quantity of goods demanded responds to changes in price and is calculated using the formula below.
Elasticity = Proportionate change in quantity/Proportionate change in price
When price of fast food meals increases to AED 65, the new quantity demanded will be 60 meals. Using the above formula the price elasticity of demand will be calculated as follows.
Proportionate change in quantity = ([60-75] ÷75) ×100= -15÷75×100= -20%
Proportionate change in price= ([65-55] ÷65) × 100= 15.4%
Price elasticity of demand =-20%÷15.4%=-1.3
From the above calculation, the price elasticity demand with regard to fast food meals is -1.3. This illustrates that the degree of elasticity with regard to fast food meals is high.
If the consumers’ income rises from $ 875 to $ 950 and there is no other influence of buying plans changes and the quantity demanded decreases from 50 to 40 meals per day. Calculate income elasticity of demand and identify the type of the meal.
Income elasticity of demand is used to determine the consumers’ sensitivity to income changes. The formula below is used to calculate income elasticity of demand.
Income elasticity of demand (EDY)
= [(Current quantity (Q) –Previous quantity (Q)) ÷Previous quantity (Q)] ÷ [(Current income Y- Previous income Y) ÷ Previous income].
= [(40-50) ÷40] ÷ [(950-875) ÷875]
From the calculations, the income elasticity of fast food meals is negative. According to Boyles and Melvin (103), a commodity with a negative income elasticity of demand is regarded as an inferior good. Therefore, as the consumers income increase, the demand for fast food meals declines.
Boyles, William and Melvin, Michael. Microeconomics. Mason, OH: South Western Cengage, 2011. Print.