The market demand for good X is: (1) XD(t) = 240 – 4P(t) Where XD(t) is the quan
ID: 1142061 • Letter: T
Question
The market demand for good X is:
(1) XD(t) = 240 – 4P(t)
Where XD(t) is the quantity of good X demanded in period (t) is the market price of good X in period t. the market supply of good X is given by
(2) Xs(t) – 2pe(t)
Where Xs(t) is the quantity of good X supplied in period t and pe(t) is the suppliers’ expectation of the market price of good X in t. Suppose the suppliers’ price expectation is given by
(3) Pe(t) = P(t-1)
Where P(t-1) is the market price of good X in period t-1.
e. calculate P(t) and X(t) for t=1,.,5 when P(0)= 50. Discus the adjustment process for the first five periods in this case. Illustrate your discussion with an accurately drawn and completely labeled demand and supply diagram. (Hint: your diagram will have a downward sloping demand curve defined by equation (1), a single upward sloping : “long run” supply curve defined by equation (2) and a series of vertical ‘market period’ supply curve at the quantity supplied in any given market period t. Pay attention to the slope if the demand curve in relation o the slope of the of your demand and long run supply curve. In particular, be sure the relative slopes of your demand and long-run supply curves are consistent with the demand function and the long-run supply function specified above in equations (1) and (2) which one is “steeper”? the demand or supply curve? Keep in mind that economists have the axes “backwards” you probably will have to “reverse engineer” your diagram to match your calculations and your discussion pf the adjustment period.
f. calculate P(t) and X9t) for t=1,.,5 when P(0)=30. Discuss the adjustment process for the first five periods in this case. Now suppose the market demand for good X is given by: XD(t) = 240 – P(t) The supply side of the market is still described by equations (2) and (3)
g. derive an equation that specifies the new short-run equilibrium relationship between P(t) and P(t-1) when the market demand is given by equation (1).
h. derive the new long-run equilibrium price and the new long-run equilibrium quantity.
i. calculate P(t) and X(t) for t=1,.,4 when P(t)=85. Discuss the adjustment process for the first four periods in this case. Illustrate your discussion with an accurately drawn and completely labeled demand and supply diagram. (hint: apply the hint from part e here. Keep in mind that you are now working with a “new” demand function as a specified in equation (1i).
j. calculate P(t) and X(t) for t=1,.,4 when P(0)=75. Discuss the adjustment process for the first four periods in this case.
k. how and why do the adjustment periods in part e and f differ from the adjustment patterns in parts I and j.
Explanation / Answer
Generally, it is seen that the demand for the product decreases with an increase in the price of the product. and the vice versa.
Market demand is defined as the total amount of purchases of a product or family of products within a specified demographic. The demographic may be based on factors such as age or gender, or involve the total amount of sales that are generated in a particular geographic location.
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