Question

Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes and indicate for each axis the units being used to measure price and quantity. Then answer the questions.

Price

Quantity demanded

(bushels of wheat)

Price

Quantity supplied

(bushels of wheat)

$4.20

125,000

$4.20

230,000

4.00

150,000

4.00

220,000

3.80

175,000

3.80

210,000

3.60

200,000

3.60

200,000

3.40

225,000

3.40

190,000

3.20

250,000

3.20

180,000

3.00

275,000

3.00

170,000

A.    Give the equilibrium price and quantity for wheat.

B.    Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.

C.    If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there would be a surplus or shortage and how much it would be.

D.    Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

E.     Assume that the consumer income increase what will be the effect on equilibrium price and quantity.

Answer 1

We have the following data given

Price($)	Quantity demanded (bushels of wheat)
4.20	125000
4.00	150000
3.80	175000
3.60	200000
3.40	225000
3.20	250000
3.00	275000

Price($)	Quantity supplied (bushels of wheat)
4.20	230000
4.00	150000
3.80	210000
3.60	200000
3.40	190000
3.20	180000
3.00	170000

Merging the tables :

Price	Quantity Demanded (bushels of wheat)	Quantity Supplied (bushels of wheat)
4.20	125000	230000
4.00	150000	220000
3.80	175000	210000
3.60	200000	200000
3.40	225000	190000
3.20	250000	180000
3.00	275000	170000

Demand & supply curve for the above data set is as follows:


a) Equilibrium occurs at the point wher demand is equal to supply. Here the point where demand is equal to supply has quantity of 200000 bushels of wheat and price at equilibrium is $3.6/bushel. The same can be obtained from the table also. At the table quantiti demanded = quantity supplied signifies equilibrium. Equilibrium price = $3.6 & Equilibrium quantity = 200000 bushels of wheat (marked bold).

b) Equilibrium price & quantity are marked with black lines on respective axis as follows:


c) FED have decided to set price of wheat at $4.00 / bushel. At this price, quantity demanded is  150000 bushels and quantity supplied is 220000.
Hence at price $4.00 there is excess supply or surplus.
Amount of surplus = Supply - Demand = 220000 - 150000 = 70000 bushels of wheat.

d) The surplus is marked in the demand supply schedule as follows (also marked green) :

e)If consumer's income increases, then his demand will increase. As a result, demand curve will shift to the right (UPWARD). Supply will be same. As a result, price will increase and quantity will increase corresponding to equilibrium. Such changes can be shown as follows:

Black line is new demand curve due to increase in income.