Equilibrium quantity

Equilibrium quantity 

For your final project, you will conduct a course-long comprehensive analysis of select operations for the Vanda-Laye Corporation. Through Weeks 1, 3, and 5, you will conduct an analysis of given situations for the company and use that analysis in the decision-making process.

The final project will be due in Week 5 and will be a comprehensive analysis document with a write-up and graphs. The assignments in Weeks 3 and 5 are major projects and may be time consuming. Accordingly, work on these portions of the final project should begin prior to the week in which they are due. The following is a summary of the weekly deliverables for your final project:

Week 1 An analysis of supply and demand data, with supporting information regarding market conditions and possible changes in those conditions
Week 3 A report on possible operating structures for the company, including CVP analysis, operating leverage, and return on equity (ROE)
Week 5 ·  An analysis of two proposed product lines and the selection of one product line that will be most beneficial to the company

·  A comprehensive final report that combines all previous analyses and fully addresses the concerns of the company

Assignment for Week 1

Final Project Scenario

You are an economist for the Vanda-Laye Corporation, which produces and distributes outdoor cooking supplies. The company has come under new ownership and management and will be undergoing changes in its product lines and operating structure. As an economist, your responsibilities include examining the market factors that affect success or failure of a product, including the supply and demand for the product, market conditions, and the behavior of competitors with similar products.

Your supervisor, Jorge, has assigned you the task of evaluating a new product. The new product, oven mittens, has several competitors in the marketplace, but your company will be using a new patented material that provides protection from heat and maintains a great deal of flexibility. The supply and demand functions for oven mittens are as follows:

Qd = 45 – 6.9P

Qs = –15 + 10P

whereQd is the quantity demanded, Qs the quantity supplied, and P the price.

Tasks:

Jorge has asked you to research the market and provide detailed responses to the following questions:

  • What is the equilibrium price and quantity for oven mittens? Using Microsoft Excel, construct a table that shows the quantity demanded, the quantity supplied, and the surplus or shortage associated with prices from $2 to $5.55. (Use appropriate intervals.) Indicate the level at which equilibrium is achieved. Graph the data, indicating the equilibrium level and the areas of shortage or surplus.
  • If a price floor were established at $4, what would happen in this market? Explain your answer.
  • If a price ceiling were established at $3, what would happen in this market? Explain your answer.
  • What will happen to the demand curve for the product if the following changes occur? Answer separately for each change, assuming each event to be independent of the other:
    • The price of the substitute Good A
    • The price of the complementary Good C

Solution 

What is the equilibrium price and quantity for oven mittens?

The Equilibrium price is $3.5503 and Equilibrium quantity is 20.50, which is obtained by equating the Quantity demanded and Quantity Supplied.

The point of equilibrium is denoted by E in the graph

Price VsQdand Qs  Graph

If a price floor were established at $4, what would happen in this market? Explain your answer.

The equilibirium price is $3.5503 which is less than $4, since the establish floor price is above the equilibirium price. It means consumers will be forced to pay more for oven mittens then there is a possibility that there will be an excess supply or a surplus. If this happens, producers who can’t foresee trouble ahead will produce the larger quantity where the new price intersects their supply curve. Unbeknownst to them, consumers will not buy that many goods at the higher price and so those goods will go unsold.

If a price ceiling were established at $3, what would happen in this market? Explain your answer.

The equilibrium price is $3.5503 which is greater than $3, since the established ceiling price is below the equilibrium price. It means that there will be excess demand of oven mittens. Producers won’t produce as much at the lower price, while consumers will demand more because the goods are cheaper. Demand will outstrip supply, so there will be a lot of people who want to buy at this lower price but can’t. Producers are truly harmed, as their surplus is doubly hit with a reduction in the number of firms willing to take that lower price, and those who remain in the market have to take a lower price.

What will happen to the demand curve for the product if the following changes occur?

  1. a) Price of substitute Good A increases.

If the price of substitute Good A increases, it means that people will buy it less, the demand curve for the product (oven mittens) will shift out for all price levels, leading to more consumption of the product.

  1. b) The price of the complementary Good C

If the price of complementary Good C increases, then the demand of the product will decrease, because price and demand are inversely related. The oven mittens and Good C are complementary, so when the price of Good C increases, demand of oven mittens decreases because what use of is the oven mittens without Good C, which is expensive.References

  1. Price floor retreived from https://en.wikipedia.org/wiki/Price_floor
  2. Price ceiling retreived from https://en.wikipedia.org/wiki/Price_ceiling
Price of Oven Mittens 2 2.355 2.71 3.065 3.42 3.5503 3.775 4.13 4.485 4.84 5.195 5.55
Qd(Quantity Demanded) 31.2 28.751 26.301 23.852 21.402 20.503 18.953 16.503 14.054 11.604 9.1545 6.705
Qs (Quantity Supplied) 5 8.55 12.1 15.65 19.2 20.503 22.75 26.3 29.85 33.4 36.95 40.5
Surplus 0 3.7975 9.797 15.797 21.796 27.796 33.795
Shortage 26.2 20.201 14.201 8.2015 2.202 0