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1.3 Question 3:

Demand function (D) : 12000 - 200P

Supply Function ( S) : 7000 + 50P
a)      Find equilibrium price

 As to achieve equilibrium, demand and supply have to intersect each other at a point, and that point is considered to be the equilibrium point, in a closed economy. A closed economy refers to that economy where the foreign market is closed for the goods and services. In other words, the point where the quantity demanded by the people equals the quantity supplied is where the equilibrium price gets finalized. The price at which both the supplier and the purchaser is ready to sell and buy the product, respectively, is the equilibrium price. Thus, to get an equilibrium price we need to equate the demand function and the supply function.

D = S

12000 - 200P = 7000 + 50P

 = 12000-7000 = 50P +200P

= 19000 = 250P

= 76 units= Price

Thus the equilibrium price at which the good will be sold for the given demand and supply function in the closed economy is 76 units.

b)  Finding the domestic quantity demanded and supplied along with the number of imports and exports.



The world price of cars 18 units

Considering the given demand function which the domestic demand function, in an open economy with the world price of 18 units per car, the domestic quantity demanded can be calculated by substituting the world price in the demand function.

 D = 12000 - 200 P

D = 12000 - 200 (18)

D = 8400 units.

Domestically, the quantity demanded at the world price 18 per car is equal to 8400 units.

Similarly than quantity supplied domestically in an open economy with world price 18 per car can be calculated by substituting the price in the supply function (study.com, 2018).

S = 7000+50P

 S = 7000 + 50(18)

S = 7900 units.

The quantity supplied domestically in an open market with the world price of 18 per car, is 7900 units.

Since                                                                                                                                                         the quantity demanded exceeds the quantity supplied that is (D>S = 8400>7900), the car is likely to be imported to an amount of 500 units (D-S, 8400-7900). The domestic suppliers might oppose the import as the demand for the car will be met by the would fall. The domestic suppliers would have enjoyed the excess demand by the increase in the car price (Stiglitz, et al. 2015, p.43). And the imports would meet up the excess demand; hence the domestic suppliers will be in loss. The public demanding the cars will be in favour of the import decision of the cars as they would enjoy the purchase of the car at slightly lower prices than that price which would have been higher in case of domestic suppliers supplying it (www.economicsdiscussion.net, 2018).  

c) Effect of the tariff of unit per car on quantity demanded and supplied along with the quantity import and export.


As it is mentioned that a one unit tariff is imposed per car, that means the prices of the cars increases by a single unit, hence the price after tariff is 19 units, (18 +1) units. The quantities demanded and supplied domestically and the quantity imported gets affected (Web.mit.edu,                                2018).

Effect on domestic quantity demanded

D = 12000 - 200P

   = 12000 - 200(19)

  = 8200 units.

Thus, the quantity demanded domestically gets affected by 200 units (8400-8200) units. A tariff imposition makes the prices higher in the home country and thus the quantity demanded it falls and a movement along the demand curve is seen and this leads the consumers to suffer a loss of consumer surplus.

The tariff also affects then suppliers of the goods; they actually get benefitted by the imposition of the tariff as it raises the price of the product domestically (Leamer, et al. 2017, p.100). A tariff is always welco0me by the suppliers, be it domestic suppliers or the foreign suppliers.

S = 7000 + 50 p

S = 7000 + 50 (19)

S = 7950 units.

The quantity supplied domestically actually increases by 50 units (7950-7900) units. This increase in the quantity supplied is actually the result of the increased price. The suppliers have increased their production in order to gain more from the increased price (Vladušić, et al. 2018, p.15).

As both the quantities demanded and supplied domestically get affected by the imposition of the tariff, the amount of quantity imported naturally gets affected. Earlier the quantity imported was 200 units and now the quantity imported accounts to 250 units (8200-7950) units. An increase of 50 units (250-200) units is seen in the quantity imported because of the imposition of the tariff. Thus it can be seen that a tariff is always in favor of the suppliers be it domestic or international market while the customers or the consumers have a negative effect of the tariff and the demand for the product actually gets reduced by some units (Dang, et al. 2015, p.1). The tariff gets opposed by the consumers as an increase in the price actually is a loss to the consumer and tariff acts as a burden to them. 

1.4 Question 4

Find private saving, public savings and national savings.


a)      Given

Household Savings = 20

Business savings = 40

Government purchase of goods and services = 10

Government transfers and interest payments = 10

Tax Collection = 15

Gross Domestic Product (GDP) = 220

Private Savings = Y - T + TR - C

Where Y is national output that is GDP

T is taxes

TR is transfers paid by the government

And C is Consumption by the household.

Here we will consider that the household savings and the business savings are used for consumption and thus household savings will be equal to consumption.

 Substituting the values, we get

Private Savings = 220 - 15 +10 - (20+40)

                          =155 units.

Public Savings = T - G- TR

Where, G stands for government spending on goods and services.

Substituting the values, we get

Public Savings = 15 - 10 - 10

                          = -5 units.

Negative public savings indicate that the government is running out of cash and there is an existence of the deficit in the government.

National Savings, it refers to the total amount of savings done within the geographical boundaries of a country (Arestis, et al. 2015, p.400). National savings can be calculated by the private and the public savings of a country, all that is needed is to add both of it.

National Savings = Private Savings + Public Savings

National Savings = 155 + (-5) units

                            = 150 units.

b) Given

GDP = 600

Tax Collection = 120

Government Transfers and Interest Payments = 40

Consumption Expenditures = 450

Government Budget Surplus = 10

Private Savings = Y - T +TR - C

                           = 600 - 120 + 40 - 450

                            = 70 units.

Public Savings   =   T - G -TR

Here ( T - G) represents the budget surplus. When government spending is less than its collection than budget surplus exists.

                             = 10 - 40

                              = -30 units.

The savings of the government is negative that means there exists a deficit in the budget and an improvement is needed in the budget.

National Savings = Public Savings + Private Savings

                             = - 30 + 70

                             = 40 units.



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