Question

The market for pizza has the following demand and supply schedule

Price	Quantity Demanded	Quantity Supplied
$4	135	26
$5	104	53
$6	81	81
$7	68	98
$8	53	110
$9	39	121

1. What is the equilibrium price and quantity in this market?
2. If the actual price in this market is above the equilibrium price what would drive the market towards the equilibrium?
3. If the actual price in this market is below   the equilibrium price what would drive the market towards the equilibrium?

Answer 1

Answer

a. Equilibrium price = $6 ; Equilibrium quantity = 81 units

From the given demand and supply schedule, we see that when the price of pizza is $6, both the quantity demanded and quantity supplied of pizza is 81 units. Thus at the price of $6, the market is in equilibrium because at this price of pizza, the quantity demanded and quantity supplied of pizza are equal.

So, the equilibrium price is $6 and the equilibrium quantity is 81 units.

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b. If the actual price in this market is above the equilibrium price, the quantity demanded for pizza will decrease but the quantity supplied of pizza will increase.This will cause an excess supply of pizza in the market. Now the producers or sellers can sell the excess stock of pizza if the price of pizza comes down. When the price of pizza starts to fall, the quantity demanded for pizza will start to rise. The fall in price will continue untill all the excess stock of pizza disappears from the market. When the excess stock or surplus of pizza becomes zero, the market gets clear, i.e., the market again reaches its equilibrium price at which the quantity demanded for pizza equals the quantity supplied of pizza. So, it is the excess supply or surplus that drives the market towards the equilibrium.

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c. If the actual price in this market is below the equilibrium price, the quantity demanded for pizza will increase but the quantity supplied of pizza will decrease because some producers will not be willing to sell at lower price and thus will exit the market.This will cause a shortage of pizza in the market. Now the existing producers or sellers of pizza will take this advantage and will increase the price of pizza. When the price of pizza starts to rise, the quantity demanded for pizza will start to fall, and the quantity supplied of pizza will start to rise. The rise in price will continue untill all the excess demand for pizza or shortage of pizza disappears from the market. The price at which, the excess demand for pizza becomes zero, the market gets clear, i.e., the market again reaches its equilibrium position at which the quantity demanded for pizza equals the quantity supplied of pizza. So, it is the excess demand or shortage that drives the market towards the equilibrium.

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