Consider the supply and demand for cell phones. The market demand for cars is gi
ID: 1189082 • Letter: C
Question
Consider the supply and demand for cell phones. The market demand for cars is given by Q_D = 7000-30P and supply is given by Q_S = 1000
a) Find the equilibrium price and quantity.
Suppose that consumers change their expectations and believe their future income will be lower. This causes the demand curve to shift to Q_D=6500-30P
b) If prices are sticky, does this shock lead to a surplus or a shortage? By how much?
c) If prices are flexible, does this shock lead to inflation or deflation? By how much?
Explanation / Answer
(a)
In equilibrium, QD = QS
7000 - 30P = 1000
30P = 7000 - 1000 = 6000
P = 6000 / 30 = 200
Q = 1000
(b) Sticky price means price will remain at 200.
New demand curve, QD = 6500 - 30P
When P = 200, QD = 6500 - (30 x 200) = 6500 - 6000 = 500
But QS = 1000
So, demand is less than supply, leading to a market surplus equal to (1000 - 500) = 500 units.
(c) Now, price is flexible.
Since QS is unchanged, we equate new QD with QS:
6500 - 30P = 1000
30P = 6500 - 1000 = 5500
P = 5500 / 30 = 183.33
So, price has decreased from 200 to 183.33, equal to 16.67.
This is a deflation, equal to (183.33 - 200 / 200 = 8.34%