Question

The table below shows the supply and demand schedules for sales of bags of chips. PRICE (dollars/bag) QUANTITY DEMANDED QUANTITY SUPPLIED (bags/week) $1.00 200 110 $1.25 175 130 $1.50 150 150 $1.75 125 170 $2.00 100 190 Question 1: What is the market equilibrium? Question 2: Describe the situation in the chip market if the price were $1.75 per bag. Question 3: If the price is $1.75/bag, explain how the market reaches equilibrium. Question 4: A bad year for potatoes decreases the quantity of chips supplied by 45 bags a day at each price. What is the new equilibrium, and how does the market adjust to it? Question 5: Population increases, so the quantity demanded increases by 5 bags a day at each price. More farmers enter the market to supply potatoes, so the supply of chips increases by 50 bags a day at each price. If no other events occur to change supply or demand, what is the new equilibrium and how does the market adjust to it?

Answer 1

Price	Quantity demanded	Quantity supplied
1.00	200	110
1.25	175	130
1.50	150	150
1.75	125	170
2.00	100	190
1)
Market equilibrium is when quantity demanded equals quantity supplied
Equilibrium price is $1.50 per bag, quantity is 150 bags.
2)
There would be excess supply as quantity supplied is 170 bags and quantity demanded is 125 bags.

3) When we have higher prices and excess supply, manufacturers will have excess inventories and the competition among manufacturers will put the downward pressure on price as there will be some suppliers who will be willing to supply at lower prices. As prices fall, the consumer demand will increase until it finally settles at the equilibrium price.

4)

Price	Quantity demanded	Quantity supplied	New quantity supplied ( Old quantity supplied minus 45 bags)
1.00	200	110	65
1.25	175	130	85
1.50	150	150	105
1.75	125	170	125
2.00	100	190	145

The new equilibrium price is $1.75 and quantity is 125 as quantity demanded equals quantity supplied.

5)

Price	Quantity demanded	Quantity supplied	New quantity demanded	New quantity supplied
			(Old quantity plus 5 bags a day)	(Old quantity plus 50 bags a day)
1.00	200	110	205	160
1.25	175	130	180	180
1.50	150	150	155	200
1.75	125	170	130	220
2.00	100	190	105	240

The new equilibrium price is $1.75 per bag and quantity is 180 bags.