Question

20 The demand and supply schedules for gum are in the table. Quantity Quantity Price demanded supplied (cents per pack) (millions of packs a week) 180 60 30 160 80 40 140 50 120 120 100 140 80 160 80 60 180 100 60 70 a. Suppose that the price of gum is 70¢ a pack. Describe the situation in the gum market and explain how the price adjusts b. Suppose that the price of gum is 30€ a pack. Describe the situation in the gum market and explain how the price adjusts. Page 5 of 6

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Answer 1

a)When the price is 70 cents quantity demanded is 80 million packs and quantity supplied is 160 million packs. this shows that there is a surplus of 80 million pax and there is a downward pressure on the price. As the prices starts reducing because of the competition among the sellers to sell more and more packs, the quantity supplied decreases while the quantity demanded increases till both of them are equal to 120 packs. This occurs at a price of 50 cents which is the market clearing price establishing the equilibrium in the market

b) When the price is 30 cents quantity demanded is 160 million packs and quantity supplied is 80 million packs. this shows that there is a shortage of 80 million pax and there is an upward pressure on the price. As the prices starts increasing because of the competition among the buyers to buy more and more packs, the quantity supplied increases while the quantity demanded decreases till both of them are equal to 120 packs. This occurs at a price of 50 cents which is the market clearing price establishing the equilibrium in the market