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Palm oil industry is rapidly growing in Indonesia and Malaysia. Both of these countries are the largest supplier of palm oil in the world. 90% of the total palm oil inventory is produced by these countries. Pakistan, China, India, European Union and United States are the major importer of Malaysian palm oil. Palm oil is used for cooking purposes, for making margarine and it is also used in non-dairy creamers and ice cream. World demand of palm oil has significantly risen during last six years. In 2008, palm oil prices increased above the $1000 per metric ton and in 2011, these prices were $1200. After this, decline in palm oil prices started and in September 2015, these prices settled at $483 per metric ton. There are many factors which affect the demand of palm oil like consumer income, price of other oils etc. Suppose the demand and supply equations of palm oil are given as follows:
Qs = 12000 + 50P
Qd =52000 - 30P
Requirement:
a) Find the market clearing level of quantity and price of Palm oil.
b) Show the market equilibrium condition graphically.
c) If P = $350 per metric ton then how much amount of shortage or surplus would
occur?
d) Find out the price elasticity of demand and price elasticity of supply of palm oil at
equilibrium price and quantity.
Solution
Answer - a
Equilibrium Price = $500
Equilibrium Quantity = 37000 = 37 Metric Ton
Answer - c
Qs = 29500 = 29.5 Metric Ton
Qd = 41500 = 41.5 Metric Ton
Shortage of 12 Metric Ton
Answer - d
PEd = - 0.41
PEs = 0.68
Read more at http://vustudents.ning.com/group/eco401economics/forum/topics/eco401-assignment-1-please-show-how-to-draw-market-equilibrium#DStDvCTBlx2Brh33.99