Initial Market Information: -Equilibrium Price: $1,000 -Equilibrium Quantity: 50
ID: 1142706 • Letter: I
Question
Initial Market Information: -Equilibrium Price: $1,000 -Equilibrium Quantity: 500 pairs of shoes Directions:
A) Draw and graph the initial market information provided in a supply and demand framework on the following grapp Immediately after the shift, and at the initial equilibrium price ($1,000) quantity demanded (QD) is 1,000 pairs of shoes on the new demand curve (D1) -Some time after the shift the forces of supply and demand equilibrate the market at a price of $1,500 and a quantity of 750 pairs of shoes. Questions:
A) After the shift, what happened to supply? What is quantity supplied (QS) immediately after the shift at the initial equilibrium price?
B) On the new demand curve (D1), what is quantity demanded (QD) immediately after the shift at the initial equilibrium price? Why did it shift?
C) Immediately after the shift (disequilibrium), is the market in a state of excess supply or excess demand? D) Did the equilibrium price and quantity increase or decrease? Why did the market’s state of disequilibrium cause the new equilibrium price to increase or decrease?
Explanation / Answer
KFC can’t set the price too low, or it would lose money. It also can’t set the price too high.
What would happen if KFC tried to charge, say, €100 for an order of chicken? Common sense
tells you that no one would buy it at that price. Now you understand that the challenge of
pricing is to find a balance: KFC needs to set the price high enough to earn a good profit on
each order sold but not so high that it drives away too many customers. In general, there is a
trade-off: as the price increases, each piece sold brings in more revenue, but fewer pieces are
sold. Managers need to understand this trade-off between price and quantity, which
economists call demand. It depends on many things, most of which are beyond the manager’s
control. These include the income of potential customers, the prices charged in alternative
restaurants nearby, the number of people who think that going to KFC is a cool thing to do,
and so on.
The simple transaction between the customer and the restaurant was therefore the outcome of
many economic choices. You can see other examples of economics as you look around you—
for example, you might know that the workers earn relatively low wages; indeed, they may
very well be earning minimum wage. Across the street, however, you see a very different kind
of establishment: a fancy restaurant. The chef there is also preparing food for customers, but
he undoubtedly earns a much higher wage than KFC cooks.