Question

. Illustrates the market has the following demand and supply schedules: 

 

Price	Quantity Demanded	Quantity Supplied
$3	111	26
$4	100	53
$5	80	80
$6	64	92
$7	51	111
$8	37	120

 

a.Graph the demand and supply curves. What is the equilibrium price and quantity in this market?

b.If the actual price in this market were above the equilibrium price, what would drive the market toward the equilibrium?

c.If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium?

 

Answer 1

In the above graph, D is the demand curve, and S is the supply curve. E is the point of market equilibrium where the quantity demanded is equal to the amount supplied.

Answer (a) - Equilibrium price is $5, and equilibrium quantity is 80 units.

Answer (b) - Price above equilibrium price will generate a situation where demand is less because the price is higher and supply is more as producers can earn more profit with increased costs. Such a situation is called excess supply or surplus.

To drive the market towards the equilibrium point, firms need to lower prices to discourage supply and encourage consumers to buy more to increase demand. This process will be continued till the equilibrium point.

Answer (c) - Price below equilibrium price will generate a situation where demand is more at lower cost and supply is less as producers will earn less profit at lower prices. Such a situation is called excess demand or shortage.

To drive the market towards the equilibrium point, firms need to increase prices to discourage demand and increase supply. This process will be continued till the equilibrium point.