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ECO401 Economics Assignment 1 Solution Spring 2013

The case:
The local sports goods manufacturing industry is one of the major source of foreign exchange earnings of Pakistan. At present, there are more than 2000 units, mostly on small scale in operation, with an installed capacity of Rs.20 billion per annum. The units are operating on single-shift basis. Sports goods worth US$261.148 million were exported in the year 2012. The industry enjoys a low markup rate of about 7% on loans and has an easy access to the European and US markets. Let the demand and supply functions of sports goods industry of Pakistan are:
Qd = 17000 –6P
Qs = 900 + 8P
However, due to increased competition by countries such as China, India and South Korea the industry can no longer enjoy the profit; it did in the region earlier. These countries might not have the seasoned labor of Sialkot but they can compete Pakistan and meet any supply order on the basis of their research and development resources and uninterrupted power supplies. But in Pakistan due to shortage of electricity, research and development price of sports goods remained at very high level.
a. Find the equilibrium price and equilibrium quantity for the sports goods industry in Pakistan. Also show the equilibrium condition graphically.

Solution:

Qd = Qs

17000 – 6P = 900+8P

8 P + 6 P = 17000 – 900

14 P = 16,100

P = 16,100/14 = 1150

 

Put Price into any 1 equation then we get quantity:

 

Qd = 17,000 – 6 P

= 17, 000 – 6 (1150)

= 17,000 – 6900

   =  10, 100

 

Qs = 900 + 8 P

= 900 + 8 (1150)

= 900 + 9200

   = 10 , 100

 

b. Find out the price elasticity of demand and price elasticity of supply of Sports goods when the industry is in equilibrium and interpret the results.

Price Ed = dQ/dP  x P/Q

b;Qd=17000-6p

Ed=p/q)(dq/dp)

we calculate earler p=1150;q=10100

dq/dp=-6 first derivativ of Qd

so now we can calculate

Ed=1150/10100)(-6)

Ed=-0.077 we alwz ignor the minus sin bcz elasticty cnnt b negative

so when the price is 1150 Ed is les thn 1

Es=p/q)(dq/dp)

dq/dp=8 first derivative of suply function

so we can calculate Es

Es=1150/10100)(8)

=0.9104
c. What will be the effect on the equilibrium situation of sports goods industry if cost of production of sports goods increases due to high per unit cost of electricity. Illustrate graphically.

Solution:

When the COP will increase, then it lead to decrease in profit, producer earn low profit or bear losses. so they decrease the production. Resultantly demand increase thats leades to increase in prices. 🙁 Sad but true 😉 so new equilibrium will……….

 

d. Suppose the Government takes initiatives to improve technology and provide better infrastructure, what will be the impact of these initiatives on equilibrium situation? Illustrate graphically.
(Marks: a: 2+2+3, b: 4+4, c: 2.5, d: 2.5)

Idea: When the technology provided then product quality and sale will increase. Then profit & production will increase. When production (Supply) will increase then thats lead to decrease in price. Equilibrium will be…

 

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