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Ecoman

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Chapter 3: Demand, Supply, and Equilibrium Prices

Chapter 4: Demand and Supply Applications

The following graph represents the market for wheat. The equilibrium price is $20 per bushel and the equilibrium quantity is 14 million bushels.

o Explain what will happen if the government establishes a price ceiling of $10 per bushel of wheat in this market? What if the price ceiling was set at $30? For a price ceiling to be effective it has to be set below the equilibrium price of the market. At $10 per bushel of wheat there will be more demand at the price ceiling at 20m bushel but the suppliers will only be willing to supply 4m bushels causing a shortage in supply. At $30 there will be a demand of 8million bushels while the suppliers would be willing to provide 24 million. This will lead to an oversupply of bushels.

o Explain what will happen if the government establishes a price floor of $30 per bushel of wheat in this market.What if the price floor was set at $10? At $30 the demand may increase depending on the necessity of the product. If not there will be an oversupply of wheat bushels as the demand at 30 will only be at 8m bushels. At $10 usd there will be no impact on the market because price floors are effective above the point of equilibrium. With a $10 price floor the suppliers may continue to charge at $20 and the demand will maintain at 14m bushels.

Chapter 5: Elasticity

Describe what will happen to total revenue in the following situations: a. Price decreases and demand is elastic.
A fall in price leads to a rise in total revenue when demand is elastic.
PED is >1 (Increase in total revenue)

Brands of products or services that have multiple substitutes typically have an elastic demand. Examples of these are our daily commodities such as cola, coffee, bread, and rice. A small decrease in price of Nescafe 3 in 1

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