Question

What are the equilibrium price and the equilibrium quantity? b. Suppose the price is currently $5. Explain what problem would exist in the market and calculate the size of that problem. What would you expect to happen to price? c. Suppose the price is currently $2. Explain what problem would exist in the market and calculate the size of the problem. What would you expect to happen to price?

Answer 1

The question is incomplete. See the attached image for the missing table showing the demand and supply schedule.

Answer/Explanation:

a. Equilibrium price is the price at which Qd = Qs. Hence, equilibrium price = $4, while equilibrium quantity is the quantity demanded at the equilibrium price, i.e. where quantity demanded = quantity supplied. Therefore equilibrium quantity = 8,000

b. At $5, there would be excess quantity supplied, i.e. Qs · Qd = 10,000 · 6,000 = 4,000. Hence, there would be wastage of resources as a result of surplus. This would lead to decrease in price in order to avoid the wastage of resources.

c. At $2, there would be excess quantity demanded, i.e. Qd · Qs = 12,000 · 4,000 = 8,000. This would lead to increase in price as a result of acute shortage in quantity supplied.