The following relations describe demand and supply.
Qd = 30,000 - 100P
Qs = -10,000 + 100P
j) Find the market clearing (equilibrium) price and quantity and show them graphically using S and D curves. A free hand graph will do as long as you identify clearly market clearing P and Q.
k) Calculate the price when the quantity demanded is 1,000 units and also the price when the quantity supplied is 1,000 units.
Following questions are designed to cover the rationale behind market clearing quantity.
l. Plot the price for 1,000 units of the quantity demanded and the price for 1,000 units of the quantity supplied in (k) on the same diagram in (j). Would there be buyers for the quantity of 1,000 units and would be sellers for the quantity of 1,000 and why? How about 5,000 units? What is the difference between the case of 1,000 units and 5,000 units? Why the market clearing quantity in (j) be sold? What is the point behind all three cases?
m. Using the rationale you used in (l), explain why eBay emerged? Ability to get the best deal is not the answer since it could happen at any yard sales on weekend. Remember eBay emerged only after a wide use of internet. Case in point: someone bought a grilled cheese at a price more than $1,000 on eBay simply because it [grilled cheese] looked like Virgin Mary, a true story.
n. Using the price you got in (k) for the quantity demanded of 1,000, calculate the quantity supplied at the price. Using the price you got in (k) for the quantity supplied of 1,000, calculate the quantity demanded at that price. Explain why this quantity will not be sold in view of market clearing and quantity obtained in (j).
o. Would there be “buyer’s remorse” at Q = 1,000? How about at Q = 19,000? Be sure to understand what does “buyer’s remorse” means. This is why we have a generous return policy in retail sale even on line.
p. Explain why the market clearing price and quantity obtained in (j) is Pareto’s optimum whereas the quantities of 1,000 and 19,000 are Pareto’s inefficiency and why? Use your understanding of Pareto’s optimality why market economy is truly efficient. In the past students regurgitated what they found about Pareto’s optimality on line without really understanding it.
q. Explain why market efficiency alone is not enough to improve welfare of a society? Give a specific example.