Question

1.5a. Explain why, in our model of an isolated market, the intersection of demand and supply curves may be thought of as an equilibrium.

b. Draw a diagram in which equilibrium arises without the intersection of demand and supply curves at a price of zero. Make your diagram large, label all curves and axes, and identify the equilibrium point. 2 1.6. Suppose you observed that in the market for wheat, 20 million bushels were sold during the first week in September for $1.00 per bushel, and that during the second week in September 25 million bushels were sold at a price of $1.25 per bushel. a. Construct a model of the market (not of consumer or firm behavior) to explain what happened. Be sure to state all of the assumptions you make. If you draw a diagram in your answer, make it large and label all curves, axes, and points. b. Use your model to explain (i) how price and quantity were determined each week and (ii) why the price of wheat went up $.25 from one week to the next.

Answer 1

15) a- equilibrium is a unique situation where the prices are exactly equalised with the quantity demand and supply so there is no glut or excess demand in the market and this equilibrium arises when demand and supply curve intersect with each other at one point. as in case of an isolated market there is no competition from outside, market will be self corracting and the price and quantity will always move towards equilibrium if any discripancy occurs.

b- at a price of zero there will be no unique supply curve here. so the equilibrium will arise according to the demand situation only as there is already unlimited supply at the market.

16) a- the prices and quntity in the market are determined according to the demand and supply situation in the market.

b- the price of wheat here goes up due to increase in demand here.