Unit 2 Managerial Economics Assignment: Market Equilibrium

Unit 2mt445 Managerial Economicsassignment Market Equilibrium And

In this assignment, you will examine factors affecting supply and demand, analyze supply and demand equations to determine equilibrium price and quantity, and evaluate the effects of per-unit taxes on market dynamics, including price, quantity, and economic welfare. You are expected to answer all questions thoroughly, provide specific examples, and follow proper APA formatting throughout your responses.

Paper For Above instruction

Market dynamics play a critical role in understanding how various factors influence the equilibrium state within a market. The market for Pepsi, as an example, can be affected by several external and internal factors that shift demand and supply curves, thereby altering the equilibrium price and quantity. Additionally, government interventions such as price ceilings and taxation further complicate these market interactions. This paper analyzes these elements comprehensively, integrating supply and demand theory, to explore their impacts on market outcomes and economic welfare.

Changes Affecting the Market for Pepsi

Various factors can influence the market equilibrium for Pepsi. Firstly, a decrease in the price of Coke, a substitute beverage, would likely reduce the demand for Pepsi, as consumers may switch to the cheaper alternative. This shift would decrease the demand curve for Pepsi, leading to a lower equilibrium price and quantity. The extent of these changes depends on the substitutability and consumer preferences involved.

Secondly, a decline in average household income from $50,000 to $43,000 would primarily affect the demand for soft drinks like Pepsi, especially if they are considered normal goods. A fall in income typically results in decreased demand, shifting the demand curve to the left, which reduces both the equilibrium price and quantity. However, if Pepsi is viewed as an inferior good by some consumers, demand might increase, complicating this general trend.

Thirdly, improvements in soft-drink bottling technology could reduce production costs, enabling producers to supply more at each price level. This technological advancement would shift the supply curve to the right, increasing the equilibrium quantity. The effect on price depends on the relative magnitudes of demand and supply shifts; if demand remains unchanged, prices tend to fall, encouraging higher consumption.

Finally, an increase in sugar prices raises production costs for soft drinks, likely increasing the retail price of Pepsi. Furthermore, a successful advertising campaign can boost demand by attracting new consumers and retaining existing ones. These effects combined—rising costs and increased demand—would push the demand curve outward and potentially raise the equilibrium price and quantity, though the precise impacts depend on the magnitudes of these shifts.

Analyzing Demand and Supply Equations

Given the demand equation Qd = 100 – 4P and supply equation Qs = 10 + 6P, solving for equilibrium involves setting Qd equal to Qs:

100 – 4P = 10 + 6P

Rearranged, this yields:

90 = 10P

Thus, the equilibrium price (P_e) is:

P_e = 9

Plugging P_e back into either equation to find equilibrium quantity (Q_e):

Qd = 100 – 4(9) = 100 – 36 = 64

or

Qs = 10 + 6(9) = 10 + 54 = 64

Therefore, the equilibrium price is $9, and the equilibrium quantity is 64 units.

When the government imposes a price ceiling at $7, the quantity demanded at this price can be found using the demand equation:

Qd = 100 – 4(7) = 100 – 28 = 72

The quantity supplied at this price is:

Qs = 10 + 6(7) = 10 + 42 = 52

Since quantity demanded exceeds quantity supplied, there is a shortage of 20 units in the market at the price ceiling of $7. This shortage indicates that consumers desire more units than producers are willing to supply at the capped price, leading to potential rationing or black market activity.

Taxation and Its Effects on Cigarette Market

Using the hypothetical diagram of the cigarette market, suppose a per-unit tax is imposed. To analyze this, we first identify the amount of the tax, which is the vertical distance between the supply curves before and after tax. Assume, for example, that the tax per unit is $2.

The consumer price after tax is typically higher than the pre-tax equilibrium price by approximately the amount of the tax, depending on the relative elasticities of demand and supply. If initially, the equilibrium price was $5, consumers might now pay around $7, with producers effectively receiving less after the tax is deducted from what consumers pay.

The total tax revenue collected by the government is the tax per unit multiplied by the quantity sold after the tax is imposed. If the new equilibrium quantity is reduced to, say, 40 units, total revenue would be:

$2 × 40 = $80

Furthermore, the tax leads to deadweight loss—the reduction in total welfare resulting from the decrease in traded quantity. The deadweight loss represents the value of transactions lost because the tax discourages certain mutually beneficial exchanges, typically shown as a triangle between the demand and supply curves on the diagram.

Overall, taxation not only raises government revenue but also causes distortions in the market, leading to decreased consumer and producer surplus and potential deadweight loss.

Conclusion

Market equilibrium is sensitive to various demand and supply determinants, including prices of substitutes, income levels, technological improvements, and input costs. External interventions like price ceilings and taxes significantly influence market outcomes, impacting prices, quantities, and overall economic welfare. Understanding these effects provides vital insights for policymakers and market participants aiming to balance efficiency, equity, and market stability.

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