Answers of Business Economics

Running head: BUSINESS ECONOMICS
Business Economics
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BUSINESS ECONOMICS
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................5
Answer 3..........................................................................................................................................9
References......................................................................................................................................12

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BUSINESS ECONOMICS
Answer 1
(a)
Figure 1: Market equilibrium for banana
(Created by Author)
Market equilibrium is reached when the quantity demanded of a product becomes
equal to quantity supplied (Fine 2016). In the banana market, the equilibrium is achieved at
the intersection point of the demand and supply curve and it is found that $2.5 is the market
equilibrium price and 2250 boxes a week is the equilibrium quantity.
(b) If $1.50 a box was the price of banana, then it is below the market equilibrium price of
$2.5. At this price, the demand for banana would be higher than the market supply and
would create excess demand in the market. In other words, there would be shortage in the
banana market. Shortage or excess demand in a market results in price hike. The market
price will continue to rise till the quantity demanded and quantity supplied are equal and
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Banana Market
Quantity demanded (boxes per week)
Quantiy supplied (boxes per week)
Quantity
Price

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BUSINESS ECONOMICS
an equilibrium is achieved. Hence, the banana firms will raise their price to gain higher
revenue and both price and quantity in the market will increase.
(c)
Figure 2: Market equilibrium after reduced supply
(Created by Author)
The quantity supplied of banana fell due to a cyclone in QLD. The supply fell by
500 boxes per week at each price level. The market demand stayed unchanged but due to
the supply reduction, the supply curve would shift to the left by 500 boxes at each price.
Fall in supply will create excess demand for the bananas and would raise the market
price. As figure 2 shows, the new equilibrium price is obtained at $3, higher than $2.5,
and the corresponding equilibrium quantity is obtained at 2000 boxes per week.
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Banana Market After fall in Supply
Quantity demanded (boxes per week)
Quantiy supplied (boxes per week)
Decreased supply (boxes per week)
Quantity
Price