Chapter 3 Equilibrium Market Price

Question 1

State the law of demand.

Answer 1

The law of demand state that within a period of time, an increase in price of a good results in a decrease in its quantity demanded and vice versa, holding all other factors constant.

Question 2

State the law of supply.

Answer 2

The law of supply state that within a period of time, an increase in price of a good results in a increase in its quantity supplied and vice versa, holding all other factors constant.

Question 3

Explain the phenomenon of surplus of good X

Answer 3

The price of good X is above equilibrium price. The quantitiy supplied is greater than the quantity demanded. Therefore, there is a surplus of good X.

Question 4

Explain the phenomenon of shortage of good X

Answer 4

The price of good X is below the equilibrium price. The quantity demanded is greater than the quantity supplied. Therefore, there is a shortage of good X.

Question 5

Explain how the average length of airplane journeys would be affected if an air departure tax of $300 on all airplane journeys is imposed.

Answer 5

With the same increase in price for both longer distance and shorter distance journey. The relative price of longer distance journey in terms of shorter distance journey decreases while the relative price of the shorter distance journey in terms of longer distance journey increases. According to law of demand, consumers will consume relatively more longer distance journey. Therefore the average length of airplane journeys would increase.