Question

In: Economics

Suppose that in a market the current price is P1, a price higher than the equilibrium...

Suppose that in a market the current price is P1, a price higher than the equilibrium price, Pe. Is this market in equilibrium or in a disequilibrium state? Please explain by answering the following questions. ( Word answers only )

1. Is Qd=Qs, Qd>Qs or Qd<Qs at P1? Why?

2. Is there any excess (Xss) -- excess demand or excess supply in this market at P1? Why?

3. Will P1 stay the same or will there be a price adjustment? Why?

Solutions

Expert Solution

1)

At the current price of P1, the market is in a disequilibrium state. At a price of P1, Qd < Qs.

Equilibrium price is the price at which quantity demanded by buyers equals quantity supplied by suppliers. According to the law of supply quantity Supplied of a commodity increases as it's price increases and decreases as it's price decreases. According to the law of demand quantity demanded of a commodity increases as it's price falls and decreases as it's price rises. Hence, at a price above than the equilibrium price, quantity supplied by suppliers will increase ( according to the law of supply) and quantity demanded by buyers will decrease ( according to the law of demand). As such, at a price P1 above the Equilibrium price Pe, Quantity Supplied will be more than Quantity demanded. Hence, at a price of P1, Qd < Qs ( Quantity demanded is less than Quantity Supplied).

2)

At a price of P1 , there exists EXCESS SUPPLY.

​​​​​​

At a price above above than the Equilibrium price, Quantity Supplied by suppliers will increase and Quantity demanded by buyers will decrease. As such, Quantity Supplied will exceed Quantity demanded at a price of P1 and hence an EXCESS SUPPLY will occur at a price of P1.

3)

There will be a price adjustment and price will fall back to Equilibrium price Pe.

At a price of P1, above than the Equilibrium price Pe, excess supply will occur. Excess supply implies that there would be unsold stock of goods at this price. Buyers seeing the unsold stock of goods may begin to ask for lower prices. Suppliers , on the other hand, may offer lower prices in an attempt to sell the unsold stock of goods. In both the cases, a downward pressure is exerted on the price and prices will fall. As price will fall, quantity demanded by buyers will increase and excess supply will start disappearing from the market . The market will again be in Equilibrium where Quantity demanded equals quantity supplied at the Equilibrium price of Pe.


Related Solutions

Suppose that the current market price for DVRs is $200 (P1) and average consumer income (Y1)...
Suppose that the current market price for DVRs is $200 (P1) and average consumer income (Y1) is $50,000. Under these conditions, 7.5 million DVRs will be sold this year (Q1). Econometricians have estimated that the elasticity of demand for DVRs is -2.65 and the income elasticity for DVRs is 3.5. Use this information to predict the annual number of DVRs (Q2) sold under the following conditions: Increasing competition from Korea causes DVR prices to fall to $185 with income remaining...
Assume a price floor is imposed in the market for milk at the current equilibrium price,...
Assume a price floor is imposed in the market for milk at the current equilibrium price, and that a price ceiling is imposed in the market for natural gas at the current equilibrium price. What will a decrease in demand for both milk and natural gas create? a. Shortages in both the milk and natural gas markets. b. Surpluses in both the milk and natural gas markets. c. A surplus in the milk market and a shortage in the natural...
Under competitive competitions, why can a market price not be higher or lower than the price...
Under competitive competitions, why can a market price not be higher or lower than the price established by the free market forces of demand and supply?
Suppose a market is in equilibrium at $10.00 and the price floor is established below the...
Suppose a market is in equilibrium at $10.00 and the price floor is established below the equilibrium at $6.00. Which of the following will happen? Select one: a. a surplus will develop b. a shortage will develop c. the quantity exchanged will rise d. the market will remain in equilibrium
Suppose the market for frozen orange juice is in equilibrium at a price of $ 1.00...
Suppose the market for frozen orange juice is in equilibrium at a price of $ 1.00 per can anda quantity of 4200 cans per month. Now suppose that at a price of $ 1.50 per can quantity demanded falls to 3000 cans per month and quantity supplied increases to 4500 cans per month compute the elasticity of supply for frozen orange juice between prices of $ 1.00 and $ 1.50. Explain your answer 3 points), 2 Katherine advertises to sell...
Consider the following situations where the market price is not equal to the equilibrium price: Suppose...
Consider the following situations where the market price is not equal to the equilibrium price: Suppose the price of the good is set at $3. Calculate the size of the surplus or shortage. Suppose that the price of the good is set at $7. Calculate the size of the surplus or shortage.
1.If the price level in the current period is higher than what buyers and sellers anticipated,...
1.If the price level in the current period is higher than what buyers and sellers anticipated, what will tend to happen to real wages and the level of employment? How will the profit margins of business firms be affected? How will the actual rate of unemployment compare with the natural rate of unemployment? Will the current rate of output be sustainable in the future? 5. (a) What is the difference between the real interest rate and the money interest rate?...
Suppose the current equilibrium point for the market of good for a closed economy is (200,...
Suppose the current equilibrium point for the market of good for a closed economy is (200, $100). Also we know the  ɛ = -2 and n = 1.5 at the equilibrium point. Suppose the economy is now open to trade. Let $110 Pw = $110 . a) What is the domestic price? b) What is the size of the export?
Compare a market operating at a quantity lower than equilibrium (ie. a price floor) with the...
Compare a market operating at a quantity lower than equilibrium (ie. a price floor) with the same market operating at the equilibrium quantity. Which of the following statements are true? a. A market operating below equilibrium will transfer some producer surplus to consumers. b. A market operating below equilibrium will transfer some consumer surplus to producers. c. A price floor will increase the producer and total surplus. d. It is unclear if the consumer surplus is greater or less at...
Explain Market equilibrium, equilibrium price, and equilibrium quantity
Explain Market equilibrium, equilibrium price, and equilibrium quantity
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT