| Chapter 3. Supply and Demand#1: Surpluses and Shortages
How much is the equilibrium price and quantity in Figure 3.1?
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Figure 3.1
The equilibrium price is $12 and the equilibrium quantity is 120. Notice that at the equilibrium price, quantity demanded is equal to quantity supplied. At a price of $16, you'll see that quantity supplied is greater than quantity demanded. When quantity supplied is greater than quantity demanded, there is a surplus. Sellers can't sell the entire quantity they would be willing to sell at that price. How much is that surplus?
The surplus is 80 (Quantity supplied is 170 and quantity demanded is 90, so 170 - 90 = 80).
Moving right along, if the price were $8, would we have a shortage or a surplus, and how much would it be?
We would have a shortage (because quantity demanded, 150, is greater than quantity supplied, 70). That shortage would be 80 (150 - 70).
#2: Price Ceilings and Price Floors
Let's briefly review the jobs of price floors and price ceilings. If the government wants to keep prices down, it imposes price ceilings. The ceilings prevent prices from rising to their equilibrium level. On the other hand, if the government wants to keep prices up, or to support them, it imposes price floors. The floor prevent prices from falling to their equilibrium level.
In Figure 3.2, how much is equilibrium price and quantity?
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Figure 3.2
The equilibrium price is $6 and equilibrium quantity is 65. If the government imposed a price of $5, would that be a price floor or a price ceiling?
The price of $5 would be a ceiling, because it would keep the price from rising to its equilibrium level of $6. Does this price ceiling create a shortage or a surplus, and how much is it?
It creates a shortage, because quantity demanded (73) is greater than quantity supplied (54). The shortage is 19 (73 - 54).
When we read a graph, not everyone gets exactly the same answers. I read the quantity demanded at 73 and the quantity supplied as 54, but you may have gotten slightly different answers. For all we know, your observations may have been more accurate than mine.
One more set of questions: If the government imposed a price of $8, would that be a price ceiling or a price floor, would it create a shortage or a surplus, and how much would it be? The price of $8 would be a price floor, because it would prevent the price from falling to its equilibrium level of $6. Because quantity supplied (80) is greater than quantity demanded (55), we have a surplus of 25 (80 - 55). |
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