QUESTION 2

a.Describe market equilibrium using relevant graphs and discuss market surplus and market shortage.

b.Suppose there are 100 identical self-service gasoline stations in the city selling the same types of gasoline. Total market demand (Q_D) and total market supply (Qs) functions for gasoline in the market are as follows:

Q_D = 60,000 - 25,000P

Qs= 25,000P

where P is expressed in $ per litre.

i. Based on the given information, calculate the equilibrium price and quantity of gasoline in the market.

ii. Explain the meaning of price elasticity of demand and the reasons business estimate it for their products.

iii. The provided demand curve is a downward sloping demand curve but it is not known whether it is inelastic or elastic. Assume that the provided demand curve may have either degree of elasticity. Draw both types of demand curve and compare the slope of the demand curves.