ASSIGNMENT

Question.1: For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm’s shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change?

Answer: In a stock market the prices are set according to the speculations of the buyers for example if for the shares of a certain company the increase in value is expected in future due to their goodwill and good financial statements, the quantity of shares demanded exceeds the quantity of shares supplied.In this situation some buyers who have the ability to pay high price will increase the offered prices until the quantity demanded equals the quantity supplied. This will cause the increase in price, on the other hand during recession the quantity demanded is less than the quantity supplied, in this situation the sellers will decrease the share prices until the quantity supplied equals the quantity demanded. This will decrease the price. A number of factors influence the quantity demanded and quantity supplied e.g. bull campaign, bear raid etc.This causes a regular change in the prices of shares.

Question.2: “In the corn market, demand often exceeds supply and supply sometimes exceeds demand.” “The price of corn rises and falls in response to changes in supply and demand.” In which of these two statements are the terms “supply” and “demand” used correctly? Explain.

Answer: In the second statement the terms supply and demand are used correctly as the change in supply and demand can shift the entire curves of supply and demand due to which the equilibrium price changes in response to which the price rises and falls.In first statement the terms demand and supply are used incorrectly, instead of demand and supply the terms “quantity demanded” and “quantity supplied” should be used respectively because the terms demand and supply are the schedules and curves that intersects at the equilibrium point (where the quantity demanded equals the quantity supplied) and the word exceeds cannot be used with them it’s the quantity supplied and quantity demanded which exceeds not the supply and demand.

Question.3: Explain why each of the following is false:a. A freeze in Brazil’s coffee-growing region will lower the price of coffee.b. “Protecting” American textile manufacturers from Chinese clothing imports

will lower clothing prices in United States

Answer: a. The statement is false because a freeze in Brazil’s coffee-growing region will shift the supply curve to the left leading to the increase in price. As there would be limited supply of the coffee consumers will be willing to pay high price.

b. The statement is false because Protecting American textile manufacturers from Chinese clothing imports will decrease the supply of the clothing which will shift the supply curve to the left leading to increase in price.

The above statements can be explained by following diagram:

P

S’ SP2

P1

Q

In this diagram as the supply curve shifts leftward from S to S’ price increases from P1 to P2.

Question.4: Assume that the demand for a commodity is represented by the equation P = 10 - 0.2Qd and supply by the equation P = 2 + 0.2Qs where Qd and Qs are quantity demanded quantity supplied respectively, and P is price. Determine the equilibrium price and quantity.

Answer: Sol: P = 10 - 0.2Qd … (1) P = 2 + 0.2Qs … (2)

From equation 1,

0.2Qd = 10 - P Qd = (10 - P)/0.2 … (3)

From equation 2,

0.2Qs = P - 2 Qs = (P - 2)/0.2 … (4)

At equilibrium

Qs = Qd(P - 2)/0.2 = (10 - P)/0.2

Multiplying both sides by 0.2

0 Q1

P - 2 = 10 - P P + P = 10 + 2 2P = 12

Dividing both sides by 2

2P/2 = 12/2 P = 6

Putting value of P in equation 3

Qd = (10 - P)/0.2 Qd = (10 - 6)/0.2 Qd = 4/0.2 Qd = 20

Putting value of P in equation 4

Qs = (P - 2)/0.2 Qs = (6 – 2)/0.2 Qs = 4/0.2 Qs = 20

Answer: (P = 6, Qd = 20, Qs = 20)