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Finding Market-Clearing Price and Quantity (Equilibrium)

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Price Quantity Demanded Quantity Supplied
$9 100 Million 40 Million
$10 90 Million 60 Million
$11 80 Million 80 Million
$12 70 Million 100 Million
$13 60 Million 120 Million

Illustrate the supply and demand curves for music CD's as per the information given in the table and answer these questions.

What are the equilibrum price & quantity?
If the industry price is $10, is there a shortage or surplus of CD's?
How much of a shortage or surplus?
Suppose in another market quantities supplied are unchanged but the quantity demanded increases by 30 million at each price, construct this demand curve and complete the following:

Is this an increase or a decrease in demand?
What are the new equilibrium quantity and the new market price?
Give 2 reasons that might cause such a change to occur.

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Solution Summary

This solution provides detailed explanation of how to find equilibrium price and quantity using market for music CDs as an example. Specific aggregate demand and aggregate supply functions are used (given in the statement of the problem), however solutions are detailed enough for a student to be able to apply to his or her own functions.

This is a numerical example, that is exposition is kept clear and only simple arithmetics is used. The example also shows that if price is not equal to its market-clearing level, there will be a shortage or surplus in the market.

Finally, we explore situation of shifting demand curve and how that affects the equilibrium price and quantity. Possible explanations for why aggregate demand curve might shift are given.

Solution Preview

The graph is attached.

We know that at the equilibrium price quantity demanded equals quantity supplied. From the table, supply equals demand at price of 11$. The equlibr. quantity is 80 million CDs.

If price is 10$ then demand is higher than supply, 90 million vs 60 million CDs, respectively. This means that there is a shortage of CDs. The magnitude of shortage is the difference between demand and supply, and in this problem it will be 30 million CDs.

In another ...

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