Demand and supply
Question one
i. Demand Curve
Demand Curve is a graphical representation that shows the association between the price of goods and the quantity demand ceteris paribus as shown in the graph I below;
The table below shows the quantity demanded gasoline at different price points
Price Quantity
0 19
0.5 16
1.0 13
1.5 10
2.0 7
2.5 4
3.0 1
Table I Graph i
As a result of the cold front in Barbados, there will be an increased effect on the quantity demanded of gasoline. This will alter the amount of gasoline demanded at any particular price point making the demand curve to shift from its original position as shown in Graph i. This explains the effect of additional buyers of a product as a factor of making the demand curve shift as shown in graph ii below. There has been a shift from Demand curve D1 to demand curve D2 as a result of an increase in demand.
Price D1 D2
0 19 23
0.5 16 20
1.0 13 17
1.5 10 14
2.0 7 11
2.5 4 8
3.0 1 5
Table ii Graph ii
ii. No directive on demand and supply is issued
If the Petroleum Company of Barbados does not issue a directive on quantity demanded and supplied; the country will be hit by a short supply of gasoline due to lack of sufficient gasoline in the inventory and as a result of high consumption by the major gasoline users. This will lead to a situation known as excess demand occasioned by a shortage of gasoline.
The shortage will lead to consumers queuing to try to get the much-needed gasoline and the suppliers will respond by increasing the prices. After the prices are increased, the quantity demanded will decrease and the quantity supplied will rise. The changes characterize movements along the demand and supply curve and these move the market to an equilibrium position.
iii. Effect of increasing supply and reducing the demand for gasoline
Equilibrium of supply and demand
This is where the demand and supply curve intersect. The quantity demanded equals quantity supplied at a particular price point as illustrated in graph iii below;
Price
SC
EP
DC
EQ Quantity
Graph iii
EP – Equilibrium price DC – Demand Curve
EQ – Equilibrium quantity SC – Supply Curve
In the Barbados case, the quantity supplied will surpass the quantity demanded to result in surplus/ excess supply. This surplus will make it difficult for suppliers to sell all they want at the prevailing price. The supplier will adjust their prices downwards leading to an increase in quantity demanded which will lead movement along the demand and supply curve until the market reaches the equilibrium. The movement is illustrated in graph IV and V below
Excess Supply
Price
SC
EP
DC
Graph iv
Price
SC
SC2
EP
DC
EP2
DC2
Quantity
Graph v
iv. Factors influencing supply and demand for water heaters
Demand
Prices of related goods/ substitutes. This will affect the goods demanded if the price of close substitutes to water heaters are favourable compared to the prices of the water heater. This will lead to consumers buying more of the substitutes over the water heaters. E.g. sweaters, heavy blankets among others.
Supply
The number of sellers – if there is a huge number of suppliers of water heaters in the market, the prices will be lower and if there are a few suppliers of water heaters, the prices will be high.
v. Price Elasticity of gasoline
This measures the sensitivity of quantity demanded to change in price. Gasoline lacks a close substitute and this makes it price inelastic as it is difficult for the consumer to switch to any other product.
Question Two
i. Market structure in St. Lucia
The market under which telecommunication services are in at St. Lucia is a monopolistic market.
Market equilibrium
The profit maximisation of monopoly: MR = MC (the essential state of profit maximisation)
$000
Marginal costs
Average Costs
Po A
Co CO B
Average revenue
Marginal revenue
QO units
The firm cannot produce less than Qo, this is because MR will be greater than MC and this will not meet the profit maximisation condition. The firm will produce at and above Qo at a price of Po generation a total revenue of Qo*Po and cost of Qo*Co making an abnormal profit of PoCoAB.
ii. Profit Making – Long Run
De Phone will achieve super-normal profits in the long run. The level of profit is dependent on the level of competition in the market, where it is non-existence in monopoly. At profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PoABCo).
iii. Discounts offers
This is to ensure that the government has cautioned the elderly and also the young whose purchasing power could be compromised. The sale of huge bundles to large consumers is a form of advertisement to promote growth in the firm.
iv. Market Structure in Trinidad and Tobago
The market structure in Trinidad and Tobago is a Competitive Market
Due to presence of freedom of entry in the industry, there will be an entry of new firms in the industry and this will lead to the supply of the product to increase and price and surplus profits will fall eventually. These will continue till there are no more surplus profits and no firm will be attracted to the industry – AR = Price and the demand curve is tangent to the average cost curve at the lowest point thus the firm will be making normal profits.
Question Three
i. Slope
The slope of the indifference curve shows the rate of substitution of a good over another by a consumer which he/she likes. This means that when the consumption of one good increases the consumption level of the other good decreases and vice versa. The rate of substitution is lowest at point B.
A
B
ii. Convex Curve
The convex curve represents the various levels of the mix in products consumed while maximising utility. When the law of diminishing marginal rate of substitution is in operation, there’s a downward and negative slope.
iii. Law of diminishing marginal utility
The Law states that with an increase in consumption of a product, the utility derived from the consumption of additional units’ deeps. This applied to the consumption of seafood.
iv. Budget Line
This shows the combination of two products which can be bought at a given level of income. When the price of one deep, there’s available income to buy the other product.
Question Four
i. Profit Maximization
The main aim of a firm is to make a profit either in the short run or in the long run. This is anchored by the main wealth creation to owners of the firms.
ii. Explicit, Implicit and Sunk costs
Explicit costs – These are costs that a company incurs from its coffers e.g. salaries and wages, rent among others
Implicit Costs – These are costs that a company has foregone by owning the resources that the firm possesses for operations e.g. owning assets rather than leasing to ease the cost of repair and maintenance.
Sunk costs – These are costs that a firm has spent and are irrecoverable e.g. purchase of fixed assets
iii. Producer Surplus v Economic Profit
Producer Surplus is the difference between the much a producer is willing to accept for any given quantity compared to the much they can gain from an open market. Whereas, economic profit is gain received by a firm after deducting costs i.e. input costs, opportunity costs and any available explicit costs from revenue generated.