Question

Market for Garden Hoses

Price ($)	Quantity Demanded	Quantity Supplied
0	42	0
1	36	8
2	30	16
3	24	24
4	18	32
5	12	40
6	6	48
7	0	56

Part 1: Without government intervention, what is the equilibrium price and quantity for garden hoses?

Part 2: Suppose that the government sets a price ceiling at $2. (a) Would there be a shortage or surplus? (b) If there is a shortage or surplus, how large is the shortage or surplus?

Part 3: Suppose the government sets a price ceiling at $4. (a) Would there be a shortage or surplus? (b) If there is a shortage or surplus, how large is the shortage or surplus?

Part 4: Suppose the government sets a price floor at $4. (a) Would there be a shortage or surplus? (b) If there is a shortage or surplus, how large is the shortage or surplus?

Answer 1

Part 1: Without government intervention, the market will be in equilibrium where demand and supply both are equal to each other. In the table, we can see that at a price of $3, both quantity demanded (24 units) and quantity supplied (24 units) are equal to each other. In this case, our equilibrium price is $3 and quantity for garden hoses is 24.

Part 2: Price ceiling is the maximum price imposed by the government which can be charged for the product. When the government set a price ceiling of $2, at this price our quantity demand is 30 units whereas quantity supply is 16. Here, our quantity demand (30) is more than quantity supply (16), so we have a shortage here. To find how large shortage is we will just subtract quantity demand and quantity supply.

Shortage = Quantity Demand - Quantity Supply = 30 - 16 = 14

Shortage = 14 Units

In this case, we have a shortage of 14 units in the market.

Part 3: A Price ceiling is effective only when the price ceiling is below the equilibrium price. Because when the price ceiling is set above the equilibrium price it will have no impact on the market because equilibrium is below this price at that point demand is already equivalent to supply. In the given question our equilibrium is at price $3 when govt. imposes a price ceiling of $4, its means firms cannot sell the product at more than $4 but here the market is already in equilibrium at $3, so here price ceiling is not binding. Hence, it will have no impact on the market. Therefore, through a price ceiling of $4, there will be no shortage or surplus in the market.

Part 4: Price floor is the minimum price imposed by the government which should be charged for the product. To be effective, it should be more than the equilibrium price. Here, the government has imposed a price floor of $4 at this price, quantity demand is 18 units and quantity supply is 32 units. Here, our quantity supply (32) is more than quantity demand (18) so there is a surplus in the market. To find how large surplus is we will just subtract quantity supply and quantity demand.

Surplus = Quantity Supply - Quantity Demand = 32 - 18 = 14

Surplus = 14 units

In this case, we have a surplus of 14 units in the market.