12. the market for rice in an east asian country has demand and supply given by

Question

12. the market for rice in an east asian country has demand and supply given by Qd = 28 -4P and Qs = -12 + 6P, where quantities denote millions of bushels per day. a. if the domestic market is perfectly competitive, find the equilibrium price and quantity of rice. Compute the triangular areas of consumer surplus and produces surplus. b. now suppose that there are no trade barriers and the world price of rice is $ 3. Confirm that the country will import rice. Find Qd, Qs and the level of import, Qd - Qs. show that the country is better off than in part ( a ), by again computing consumer surplus and producer surplus.

Explanation / Answer

Simple Direct Market Demand: QD = 6 - 0.5*P.

Simple Direct Market Supply:   QS = 4 + 2*P.

Market Equilibrium: QD = QS .

   6 – 0.5Pe = 4 + 2Pe

0.5Pe + 2Pe = 6 - 4

2.5Pe = 2

Solve for Pe. Then

Pe= 2 / 2.5 = $ 0.8 (equilibrium price also called P*).

Plug Pe in either supply or demand equation to determine the equilibrium quantity:

Qe = 4 + 2Pe = 4 + 2(0.8) = 5.6 units (equilibrium quantity)

Thus, market equilibrium = (Pe; Qe) = ($0.8; 5.6 units).

The graph of this market equilibrium is given by

http://daphne.palomar.edu/llee/101Chapter08.pdf

                                             (Fig. 2-10: Market Equilibrium)

Free Market Mechanism: The tendency of the market price to change as a result of market forces in order to clear the market (i.e., to equate QS and QD).

Then there would be a downward pressure on “P”, and once “, until QS = QD at Pe.

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