Question

The table below shows the demand and supply of coats in Small Town.

a. What is the equilibrium price of coats?

b. Will a shortage or surplus occur?

c. At what price will the most coats sold be sold?

d. The mayor of SmallTown in order to "help the poor by making coats cheaper", imposes a price ceiling of $40. How many coats will be bought and sold? Will a surplus or shortage of coats occur?

e. The mayor of Small Town, in order to "help protect our coat industry," imposes a price floor of $80 instead. How many coats will be bought and sold? Will a shortage of coats or surplus occur?

To answer all the questions, it will be easy for you to draw the supply and demand graph first to see the whole picture. Keep it up!

Price	Quantity of Coats demanded (per day)	Quantity of Coats Supplied (per day)
$80	50	110
$70	60	90
$60	70	70
$50	80	50
$40	90	30

Answer 1

(a)

The equilibrium price is that price corresponding to which quantity demanded equals the quantity supplied.

The quantity demanded equals the quantity supplied corresponding to the price of $60 per coat.

So,

The equilibrium price of coats is $60.

(b)

Shortage or surplus occurs when there is mismatch between the quantity demanded and the quantity supplied.

When the quantity demanded exceeds the quantity supplied, there is shortage.

When the quantity demanded is less than the quantity supplied, there is surplus.

At equilibrium price, quantity demanded equals the quantity supplied.

So,

There is neither shortage nor surplus at equilibrium.

(c)

The maximum quantity is sold at the equilibrium price.

The equilibrium price is $60 per coat.

So,

The price at which most coats would be sold is $60 per coat.

(d)

At $40 per coat, quantity demanded is 90 coats and the quantity supplied is 30 coats.

When quantity demanded and quantity supplied are not equal at a particular price then lower of the two is the quantity exchanged.

So,

30 coats will be bought and sold.

At price of $40 per coat, the quantity demanded exceeds the quantity supplied. In such scenario, shortage tends to occur.

So,

A shortage of coats will occur.

(e)

At $80 per coat, quantity demanded is 50 coats and the quantity supplied is 110 coats.

When quantity demanded and quantity supplied are not equal at a particular price then lower of the two is the quantity exchanged.

So,

50 coats will be bought and sold.

At price of $80 per coat, the quantity demanded is less than the quantity supplied. In such scenario, surplus tends to occur.

So,

A surplus of coats will occur.