Question

Demand, Supply and Equilibrium:

Given the following equations representing the behavior of producers and consumers:

Price Quantity Demanded Qd Quantity Supplied Qs 52                                1,560                         4,940 48                                1,700                                                                                                           4,560 44                                1,840                         4,180 40                                1,980                         3,800 35                                                                 2,155                         3,325 32                                2,260                                        3,040 29                                2,365                         2,755 26                                2,470                         2,470                     24                                                                                                                                        2,540                        2,280

Consumers: Qd = 3,380 - 35P, Producers: Qs =95P, (P: Price) (Qd: quantity demanded, Qs: Quantity supplied )

1. If a surplus exists, explain the process by which market prices will adjust? Will these prices adjust upwards or downwards?
2. Please graph the above price and quantity data and carefully label the Supply curve, demand curve, Equilibrium price, and Equilibrium quantity.

Answer 1

A) When a surplus exists, Quantity supplied exceeds quantity demanded in which case, the producers will have an excess inventory which they would be willing to sell at a lower price in order to clear the inventory so the excess supply creates a downward pressure on the market price and the price decreases until the quantity demanded = quantity supplied.

B)

60 50 40 QS 30 E -QD 20 10 0 6000 0 1000 2000 3000 4000 5000

Equilibrium price = 26

Equilibrium quantity = 2470