Question

The market for college textbooks is illustrated in the graph below. In the market for textbooks, the current price of a textbook is $125. Which of the following statements best describes the current and future market conditions for textbooks?

Answer 1

Answer:

Option D is correct.

The market for textbooks has a shortage. There will be an upward pressure on price, which will cause quantity demanded to fall and quantity supplied to rise.

Explanation:

The complete question is attached to this solution.

Note that

- The quantity demanded is the negative sloping line in colour blue indicating that the quantity demanded increases as the price of the commodity (textbook) falls and the quantity demanded rises as the price of the textbook falls.

- The quantity supplied is the positive sloping line in colour red/orange indicating that the quantity supplied decreases as the price of the commodity (textbook) falls and the quantity supplied increases as the price of the textbook falls.

The quantity demanded and the quantity supplied balance each other and cross path at a point called the equilibrium point.

The price at this point is called the equilibrium price and the quantity at this point is the equilibrium quantity.

For this question, the equilibrium price = $150 and the equilibrium quantity that matches quantity demanded with quantity supplied = 500.

At prices greater than the equilibrium price, the quantity demanded falls and the quantity supplied increases, hence, there is a surplus of the commodity (textbook) as the quantity of textbooks supplied is way more than the quantity demanded and there is more than required textbooks.

At prices lower than the equilibrium price, the quantity demanded increases and the quantity supplied reduces, hence, there is a shortage of commodity (textbook) as all of the goods supplied are totally bought with extra demand remaining.

When there is a surplus or shortage, the market forces that are responsible for price fixing and quantity demanded work together to take the market back to equilibrium.

So, when the price is higher than equilibrium price and there is a surplus, the market works to reduce the price of the commodity so that quantity demanded can rise and quantity supplied can fall to counter this surplus.

When the price is lower than equilibrium price and there is a shortage, the market works to increase the price of the commodity so that quantity demanded can fall and quantity supplied can rise to counter this shortage.

The price of the textbook in the question, $125, is lower than the equilibrium price, $150, hence, there will be a shortage of textbooks because the quantity demanded, at this price, is higher than the quantity that will be supplied.

So, there is then a pressure on the price to rise back so that the quantity demanded reduces and the quantity supplied increases.

Hope this Helps!!!