Question

10. The table shows the demand and supply schedules for running shoes. What is the market equilibrium? If the price is $70 a pair, describe the situation in the market. Explain how market equilibrium is restored. If a rise in income increases the demand for running shoes by 100 pairs a day at each price, explain how the market adjusts to its new equilibrium. Quantity (dollarsdemanded upplied Price per pair) 70 90 Quantity (pairs per day) 1,000 900 800 700 600 500 400 500 600 700 800 900 100

Answer 1

Answer

We can see from the above table that Quantity demand = Quantity Supplied = 700 when Price = $90. As, Market is in equilibrium for that level of price at which quantity demand = quantity supplied. Hence This market is in equilibrium when Price = $90 and quantity = 700 pairs.

We can also see from the above table that When Price = $70, Quantity supplied = 500 and quantity demand = 900. Hence as quantity demand > quantity supplied, this implies that this is a situation of Excess demand (Shortage). Hence when Price = $70 there is a shortage of shoes in the market. As producers will see that there is shortage of shoes in the market due to excess demand. This will put excess burden on supply and this will result in increase in Price of Shoes. This increase in price will result in increase in supply and decrease in demand. This price will continue to increase till quantity demand will get equal to Quantity supplied i.e. Price = $90.

Now suppose increase in income resulted in increase in demand of shoes by 100 pairs at all prices. Hence Again at price = 90 quantity demand( = 800) > quantity supplied (= 700), this again implies that this is a situation of Excess demand (Shortage). Hence when Price = $90 there is a shortage of shoes in the market. As producers will see that there is shortage of shoes in the market due to excess demand. This will put excess burden on supply and this will result in increase in Price of Shoes. This increase in price will result in increase in supply and decrease in demand. This price will continue to increase till quantity demand will get equal to Quantity supplied. This equilibrium Price will be between 90 and 100 (approx 95)