Analysis of Market Demand and Supply - Assignment Example

The paper "Analysis of Market Demand and Supply" is a great example of an assignment on macro and microeconomics.

And the supply curve is given by

At equilibrium, the market clears and D1=S1. Therefore, at equilibrium:

Annual is given as $50,000 and P2=$5 then the market clears at

Substituting P1 into S1 then the equilibrium number of tram trips demanded and provided is then given by:

The equilibrium state of the tram market can be presented diagrammatically as below.

The producer surplus is represented by the portion of the graph labeled B. thus the producer surplus is equal to the area between the equilibrium values and the supply curve. This equates to the area of the triangle covered by points (0, 0), (0, 5.5), and (275, 5.5)

Section B

The government intends to have a tax of $1.5 introduced into the tram business levied on trams. This will change the price for both the supplier and the consumer but the supplier tends to shift the burden of the tax to the consumer. The consumer will face a new price of while the supplier faces a price of if the demand schedule does not change, then the demand and supply are represented as

Replacing the value for P2 and Y1, the demand curve is given by:

And the supply schedule is given by:

But with the tax regime the equation

At equilibrium, D=S and replacing the prices after tax:

The new price to tram providers is given by and substituting for

Therefore at these new prices, the number of tram trips demanded by consumers will be:

The quantity of tram trips supplied by the providers is given by the equation:

Therefore the total tax revenue collected will be given by:

The introduction of the tax results in a fall in consumer surplus and also a fall in the producer surplus and a deadweight loss in the market equal to the area covered by the vertical line and the demand and supply curves. The buyers face a price equal to $6 while the producers face a price of $4.5. at this price, the number of tram trips bought and supplied is at 225, the amount consumers are willing to purchase ta the new price, and the amount the suppliers are willing to provide after the tax imposition price. The tax revenue is thus represented by the shaded are equal to the amount of tax ($6-$4.5) multiplied by the quantity 225.

Section C

The tax regime is delayed and instead, a larger company will provide the tram services. The supply curve for the company is given as:

While the existing supplier supplies sing the demand curve:

Adding the supply schedules horizontally, the market supply schedule is given by:

Assuming the demand schedule, price of buses, and income does not change, the market clears when

3.5$ will now be the new price that will be faced by both the existing provider and the new supplier. Therefore at this price level, the existing provider will supply tram trips equal to:

And the new provider will supply tram trips equal to:

In total, at the new price, the market will have a supply equal to:

With two suppliers in the market, the market for tram trips can be presented as:

The demand schedule does not change as the factors that affect demand are still the same. However, the market supply curve is different from that presented in part A and B because the new supplier increases the number of tram trips available in the market at all available prices. The market supply is therefore a horizontal summation of the supply curve of the existing suppliers and the new supplier.

Section D

An introduction of a new larger company to provide the tram services presents an opportunity for the company to take part in a monopolistic competitive market. The company has the ability to dominate the market for tram services. This could drive the already existing service provider from the market. There is a risk that the market makes turn out to be a monopoly. If the government keeps in check the dominance of the new company, the market for tram services will is more efficient. Since the new company has a larger capacity, the consumers will have a low price level with a total increase in the number of services provided. This is confirmed by the calculations from Section C that show that the price for the Tram service will now be at $3.5 if the company begins operations. Consequently, this will increase the welfare of the consumers