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Homework answers / question archive / In the table below put in the quantity demanded at each price from question 1 and put in the quantity supplied at each price from question 2
In the table below put in the quantity demanded at each price from question 1 and put in the quantity supplied at each price from question 2.
|
P |
QD |
QS |
|
0 |
50 |
0 |
|
10 |
40 |
40 |
|
20 |
30 |
80 |
|
30 |
20 |
120 |
|
40 |
10 |
160 |
|
50 |
0 |
200 |
a) Explain why P=40 is NOT an equilibrium price. What will happen to the market price if it is initially equal to $40? WHY?
b) What is the equilibrium price? What is the equilibrium quantity? Explain WHY this is the equilibrium price and quantity.
(a)
Equilibrium price is that price corresponding to which quantity demanded equals quantity supplied.
When price equals 40 per unit, quantity demanded is 10 units and quantity supplied is 160 units.
The quantity demanded is not equal to the quantity supplied when price is 40 per unit.
Therefore, P = 40 is not an equilibrium price.
At price of 40 per unit, quantity supplied exceeds quantity demanded.
When quantity supplied exceeds quantity demanded then there will be downward pressure on the prices.
So,
The market price will decrease if it is initially equal to 40.
(b)
Equilibrium price is that price corresponding to which quantity demanded equals the quantity supplied.
The quantity demanded equals the quantity supplied corresponding to the price of 10 per unit.
So,
The equilibrium price is 10.
The equilibrium quantity is 40 units.
This is the equilibrium price and quantity because if there is any increase or decrease in price then surplus or shortage will be created in the market.
This will put the pressure on price and quantity to return to equilibrium level as only at equilibrium price of 10 that quantity demanded equals quantity supplied and there is neither shortage or surplus.
