Demand, supply, and equilibrium levels.

Demand, supply, and equilibrium levels.

Question 1.

1. The graph below shows the demand and supply curves for good X at P (price) and Q (quantity).

Fig. 1. Demand and supply curve.

4. b) Approximate values for the equilibrium- the demand and supply are at equilibrium when the price is approximately 40, and the quantity is 4.
5. c) From the above graph, when the price of good X is set at a price 10, the demand will be ten units, and the supply will be 1 unit.
6. d) Reducing the cost of production of x means the price will reduce an this will increase the demand and supply hence lower the equilibrium levels

Fig. 2. Effects of increased income on equilibrium levels.

1. e) Lowering the production cost of X implies a reduction in prices, resulting in increased demand and supply, thus reducing the equilibrium levels, as shown in fig. 3 below.

Fig. 3. Effects of reduced production cost on equilibrium levels.

Question 2. Marginal costs

In a perfect market, the demand equals the supply. Increasing the marginal cost will affect the supply curve because an increase in the price of producing the unit will lower the quantity. After all, the demand will be low. If the supply curve slopes up, the companies will have to increase production cost, therefore increasing the price.

Question 3. In a free market equilibrium, the demand equals supply.

a)

Fig. 4. Demand and supply for free market equilibrium.

b). In the free market, the externalities can be both positive and negative. The presence of externalities means that in solar panel production, they will consider factors such as pollution and individual education. Other additional costs result in reduced production failing to meet the demand requirements.

c).

Fig. 5. Comparison of the free market and socially desirable quantities of the solar panel.

In the socially desirable quantities markets, externalities’ presence results in a reduced supply of the solar panels failing to meet the demand leading to increased marginal costs of the solar. In such a case, prices rise, lower the quantity, and consequently reduce the equilibrium levels compared to the free markets.

d). Government policies that could be used to improve on the open market outcome are:

Subsidies can be applied in cases of positive externalities, e.g., educating the workforce in producing quality solar panels that are environmentally friendly and reliable to users.

Reduced taxes for the solar panel manufacturers would result in improved free-market equilibrium by lowering marginal cost. Consequently, reduced production cost leads to increased production and ensuring the creation of a socially demanded quantity of the goods.