Q.
Explain the following terms:-
i) Elasticity of demand. (6 marks)
ii) Equilibrium market price. (6 marks)
iii) Factors of production. (8 marks)
(20 marks, 2013 Q3)
A.
i) Elasticity of demand can be found in earlier posts:
- Elastic or inelastic of demand,
- Price elasticity of demand and supply.
- Elasticity of demand and supply.
ii) Equilibrium market price.
Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or supply there will be no change in market price.
In the diagram below, the quantity demanded and supplied at price P1 are equal.
At any price above P1, supply exceeds demand and at a price below P1, demand exceeds supply. In other words, prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market.
Consider the following example. The weekly demand and supply schedules for T-shirts (in thousands) in a city are shown in the table below:
- The equilibrium price in the market is £5 where demand and supply are equal at 12,000 units
- If the current market price was £3 – there would be excess demand for 8,000 units
- If the current market price was £8 – there would be excess supply of 12,000 units
- A change in fashion causes the demand for T-shirts to rise by 4,000 at each price. The next row of the table shows the higher level of demand. Assuming that the supply schedule remains unchanged, the new equilibrium price is £6 per tee shirt with an equilibrium quantity of 14,000 units
- The entry of new producers of T-shirts into the market causes a rise in supply of 8,000 T-shirts at each price. The new equilibrium price becomes £4 with 18,000 units bought and sold.
Ref:http://www.tutor2u.net/economics/content/topics/demandsupply/market_equilibrium.htm
iii) Factors of Production refer to earlier post here.