Question
In: Economics
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.
Solutions
Expert Solution
Answer : Let the market equilibrium price is $5 and equilibrium quantity is 5 units.
1) Now if the market price is $3 then the market will face a situation of shortage. Because of lower price than the equilibrium price the quantity demanded becomes higher than the quantity supplied.
Let the quantity demanded is 7 units and quantity supplied is 3 units at price level of $3. So, at $3 price level the shortage = quantity demanded - quantity supplied = 7 - 3 = 4 units.
Therefore, at $3 price level the market faces a shortage of 4 units.
3) Now if the market price is $7 then the market will face a situation of surplus. Because of higher price than the equilibrium price the quantity supplied becomes higher than the quantity demanded.
Let the quantity supplied is 7 units and quantity demanded is 3 units at price level of $7. So, at $7 price level the surplus = quantity supplied - demanded = 7 - 3 = 4 units.
Therefore, at $7 price level the market faces a surplus of 4 units.
Rahul Sunny answered 1 year agoRelated Solutions
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