(Equilibrium) If a price is not an equilibrium price, there is a tendency for it
ID: 1177368 • Letter: #
Question
(Equilibrium) If a price is not an equilibrium price, there is a tendency for it to move to its equilibrium level. Regardless of whether the price is too high or too low to begin with, the adjustment process will increase the quantity of the good purchased. Explain using a demand and supply diagram.
Price per bushel
$1.80
2.00
2.20
2.40
2.60
2.80
Quantity demaned (millions of bushels)
320
300
270
230
200
180
Quantity supplied (millions of bushels)
200
230
270
300
330
350
Surplus or shortage
?
?
?
?
?
?
Will price or fall
?
?
?
?
?
?
Complete the chart above
a. What market pressure occurs when quantity demand exceeds quantity supplied? Explain
b. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain
c. What is the equilibrium price?
d. At each price in the first column of the chart above, how much is sold?
Fill in surplus or shortage price rise or fall
Explanation / Answer
(Equilibrium) If a price is not an equilibrium price, there is a tendency for it to move to its equilibrium level. Regardless of whether the price is too high or too low to begin with, the adjustment process will increase the quantity of the good purchased. Explain using a demand and supply diagram.
Price Per bushel
Quantity demanded
Quantity supplied
Surplus or shortage
Will price rise or fall
1.80
320
200
Shortage of 120 [=320-200]
Price will rise
2.00
300
230
Shortage of 70 [=300-230]
Price will rise
2.20
270
270
Neither surplus nor shortage
No change in price
2.40
230
300
Surplus of 70 [=230-300]
Price will fall
2.60
200
330
Surplus of 130 [=200-330]
Price will fall
2.80
180
350
Surplus of 170 [=180%u2014350]
Price will fall
Complete the chart above
a. What market pressure occurs when quantity demand exceeds quantity supplied? Explain
When quantity demanded exceeds the quantity supplied in a perfectly competitive market, there are more sellers than buyers of the good at that price. Thus there are many buyers who are unable to buy the good at the given price since only a certain amount of the good is supplied. With each buyer and each seller being identical, i.e. they demand and sell identical products, the sellers can charge a higher price for the good and still be able to find buyers willing to pay a higher price for that good. Thus there is an upward pressure on prices and as price rises, quantity supplied increases while quantity demanded decreases and the pressure exists till quantity demanded and supplied are equal.
b. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain
When quantity supplied exceeds the quantity demanded in a perfectly competitive market, there are more buyers than sellers of the good at that price. Thus there are many sellers who are unable to sell the good at the given price since only a certain amount of the good is demanded. With each buyer and each seller being identical, i.e. they demand and sell identical products, the seller has to charge a lower price for the good to be able to find buyers willing to buy the good. Thus there is a downward pressure on prices and as price fall, quantity supplied decreases while quantity demanded increases and the pressure exists till quantity demanded and supplied are equal.
c. What is the equilibrium price?
Equilibrium price is the price at which quantity demanded equals the quantity supplied. In this case the equilibrium price is $2.20 per bushel.
d. At each price in the first column of the chart above, how much is sold?
At each price, the short side of the market determines the market quantity being transacted.
At the price of $1.80, supply is the shorter side and hence only 200 million bushels are sold.
At the price of $2, supply is the shorter side and hence only 230 million bushels are sold.
At the price of $2.20, supply and demand are equal and hence only 270 million bushels are sold.
At the price of $2.40, demand is the shorter side and hence only 230 million bushels are sold.
At the price of $2.60, demand is the shorter side and hence only 200 million bushels are sold.
At the price of $2.80, demand is the shorter side and hence only 180 million bushels are sold.
Price Per bushel
Quantity demanded
Quantity supplied
Surplus or shortage
Will price rise or fall
1.80
320
200
Shortage of 120 [=320-200]
Price will rise
2.00
300
230
Shortage of 70 [=300-230]
Price will rise
2.20
270
270
Neither surplus nor shortage
No change in price
2.40
230
300
Surplus of 70 [=230-300]
Price will fall
2.60
200
330
Surplus of 130 [=200-330]
Price will fall
2.80
180
350
Surplus of 170 [=180%u2014350]
Price will fall
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.