Question

when will M Pro 3) Recall that the most efficient price and quantities are defined by the equilibrium point. That is, the price where the quantity supplied and quantity demanded are the same. At a price of $3, suppose that 400 donuts are demanded at the Belle's Donut shop, and 500 are supplied. a. Draw a supply and demand graph that displays this outcome, and draw a dotted line through the price of $3. Note: you will not be able to find an exact value for equilibrium, so just use a reasonable approximation. Hint: Should the price of $3 be above or below the equilibrium? b. What will happen to the quantity that is finally sold on the market if Belle lowers her prices?

Answer 1

a)

The figure below gives the market for the donut. At the price of $3, the quantity demanded is 400 and supplied is 500. Then there is excess supply at the existing market price. Therefore, the equilibrium price must be below $3.

Price Supply el a Excess Supply o PE - - - - + - - - - - - - - - Demand 400 500 Quantity

b)

The excess supply implies that there are some firms willing to supply the goods at a lower price and the consumers' willingness to pay is lower for quantity supplied. therefore, if the firm decreases price below $3, the consumer will buy more at lower prices. At the lower price, the firm will supply less. Then the quantity demanded will rise and the quantity supplied will fall. Then the excess supply gap will fall with each incremental price fall. This will continue until the quantity demanded equal supplied at equilibrium price P*. The quantity will settle between 400 and 500 to Q*.