Chapter 2R, Problem 1FRQ

a)

To determine

The question requires us to draw the supply and demand curve for the paintings and show the equilibrium price and quantity of the paintings.

Explanation of Solution

In the market for paintings, S1 shows the vertical supply curve, and D1 is the demand curve for paintings. The supply curve is vertical because the number of paintings is fixed (Q = 1000 units). The intersection point of the supply and the demand curve shows the equilibrium state in the market.

At equilibrium,

Quantity supplied = Quantity demanded = 1000 units.

The following graph represents the market for paintings:

  

Here, E1 represents the equilibrium point where the supply curve and demand curve intersect each-other. The equilibrium quantity is Q and the equilibrium price is P1.

Economics Concept Introduction

The demand curve represents the relationship between the price and quantity demanded of a commodity while the supply curve represents the relationship between the price of a product and the quantity supplied at the given price.

The demand curve is a downward-sloping curve that represents the inverse relationship between the quantity demanded and the price of the product i.e., when the price of a product increases its quantity demanded falls and vice versa. On the other hand, the supply curve is a positive-slope curve that represents the positive relationship between the price of the product and the quantity supplied.

b)

To determine

The question requires us to list the five principal factors that impact the price of paintings in the market.

Explanation of Solution

Any change in supply and demand of the paintings will cause the price of paintings to change. The five principal factors that can impact the price of paintings are the following:

1. Price of relative products: when the price of similar paintings will fall then the demand and thus the price of Pablo’s paintings will fall as well because consumers will prefer less expensive products over expensive ones.
2. Income of consumers: A higher income indicates higher demand for paintings and thus causes the price of paintings to rise.
3. Taste and preferences of consumers: Due to some reason consumers start giving preference to Pablo’s paintings and start demanding more. Again a higher demand will cause the price to rise. 
4. Lack of logistic and market supports: Due to poor connectivity between buyers and suppliers, the price of paintings will change.
5. The expectation of a higher price soon: When consumers expect a higher price for the painting soon, they demand more and a higher demand will hike the price level.

c)

To determine

The question requires us to determine the impact of high demand on the price of paintings.

Explanation of Solution

The following graph represents the impact of high demand in the painting market:

  

Here, E1 represents the initial equilibrium state in the painting market. At equilibrium Q represents the equilibrium quantity, and P1 represents the equilibrium price. When wealthy art collectors decide to buy the paintings, the demand for paintings will increase. A higher demand causes the demand curve to shift rightward from D1 to D2, and results in a higher price P2.

E2 represents the new equilibrium point, where P2 is the new market price for the paintings.

An increase in demand will only increase the price of paintings. There will be no impact on quantity because the supply of paintings is fixed.