Economics Solved Solutions Demand and Supply

Solved Questions 

Question: Quantum is a global metropolis country and a hub in technology and biotechnology. It has a thriving e-commerce market where four large companies compete. These four companies employ a sizeable population of employees as a percent of the city’s work/labor force. A prominent global leader enters the market and offers a 100 percent increase in the salaries of its employees at the managerial level. This industry is ultra-sensitive to wages with a high attrition rate. The new firm aims to employ a sizeable population of the work/labor force. The city has a young, dynamic population with a workforce of about 65 percent, with a majority of the workers working within the technology and biotechnology sector. Assume that an increase in wages will increase the propensity to consume. Keeping other factors constant, answer the following questions.

1). What will other technology companies esp. in the e-commerce space do to with respect to their pay scale of their employees.

2). Now assume that Pizza and Chaas (a spicy Buttermilk beverage) are famous among the people of the city Quantum. Pizza and Buttermilk are trendy among the employees as part of their mid-day lunch/snack, and generally, they order both Pizza and Buttermilk together. Please assume that the other technology companies increase salaries of their employees but with varying degrees of percent increases, what would be now the result of the demand curve of the Pizza, keeping other factors constant. What will happen to the demand of Chaas? Please explain.

3). If you plot the price and quantity of the demand curve of the Pizza, what will the slope of this curve imply. Why is it important?

4). In the above case, consider that 60 percent of the time, people order Chaas/ Buttermilk when they order Pizza. The price of ingredients required to make Chaas have increased, leading to an increase in the cost price of the Buttermilk. What will happen to the supply curve of the Chaas now? Plot the new market equilibrium.

5). For the two sets of pair 2p+7q=25 (demand) and p-2q = 7 (supply); find the equilibrium points.

Answer 

1). This is an open-ended question. Companies use different aspects in retaining talent. The easiest, in this case, would be to increase the salary although it need not be of the same amount. Companies have used changing the ecosystem in a particular sector by doubling employees’ wages to poach talent from competitions, but you need to remember if these practices are sustainable.

2). An increase in the remuneration of the employees within the technology sector will lead to increase in the aggregate demand within the economy. 

An increase in aggregate demand would lead to a rise in consumption, leading to increased demand for Pizza and Buttermilk. The demand curve will shift rightward/ outward with the price of the Pizza increasing from P to P1. Pizza sold will increase from Q to Q1 as the market equilibrium increases from A to B. The same applies to Buttermilk.  

3). It shares a sensitivity analysis of the change in the price of Pizza to the number of pizzas sold. The slope of the demand curve is the change in the price of Pizza to the quantity of Pizza demanded. It helps pizzerias (outlets selling pizzas) to price their products better, understand the sensitivity of consumers to change in the price of pizzas, etc.

 4). Price rise leads to left or upward shift of the supply curve with the price of Buttermilk rising from P to P1. The market equilibrium point shifts from A to B, the quantity reduces from Q to Q1. The rise in price of the ingredients leads to rise in cost of Buttermilk with rise in the selling price of the beverage.

 5). At equilibrium demand is equal to supply. The points of the two equation must satisfy both the equations i.e. find coordinates of the intersection of the two equations

2p+7q=25

p-2q = 7 multiply this equation by 2 to get 2p-4q = 14 and subtract this equation from the first equation

2p+7q=25

– (2p-4q = 14)

11q = 11 or q = 1

Substitute the value of q in any of the two equations to get the value of p

2p+7q=25 2p + 7(1) = 25 ====> 2p = 25 -7 = 18 ========> p = 9

(p, q) = (9,1)