Question

Suppose T-shirt shops on Market Street are selling T-shirts for $15, yet they can’t keep enough shirts on the shelves to satisfy all the customers who come in.

a. Draw a graph illustrating this situation.

b. Explain the graph.

c. Describe how (if at all) you would expect the price to adjust as a result.

Answer 1

Answer: As T-shirt shops on market street are selling T-shirts for $15, yet they can’t keep enough shirts on the shelves to satisfy demand, this means that the selling price of $15 is below the equilibrium price of T- shirt and hence at price $15, there is excess demand I.e. quantity demanded is greater than quantity supplied at price of $15 and hence there is shortage of T-shirt at price of $15.

a.

b. Now here equilibrium occurs when the demand curve intersects the supply curve at point O and the equilibrium price of T-shirt is P* and equilibrium quantity of T-shirt is Q*. Now at price of $15, we see that the quantity demanded is Q^D and the quantity supplied is Q^S and hence as the quantity demanded becomes greater than the quantity supplied, hence there will be shortage of T-shirt =

(Q^D-Q^S) and thus the shops cannot deliver T-shirt to all customers who come in.

C. Now as at $15, there is excess demand or shortage of T-shirt, this shortage will create an upward pressure on the price level and as a result of which, prices starts to increase from $15 and as price starts to increase, demand for T-shirts begin to decline and supply of T-shirts begin to increase and this process will continue until Demand equals supply of T-shirt and equilibrium price P* is reached.