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the differences among surplus, shortage and equilibrium.

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1. Explain, in your own words, the difference between surplus, shortage and equilibrium. What characteristics does each of them possess?
In equilibrium, quantity supplied equals quantity demanded, and buyers and sellers "agree" on a price and quantity to be bought and sold. In this equilibrium, all of the buyers who value the good more than or equal to the price buy it, and all of the sellers who can produce the good at a cost less than or equal to the price sell it. This is also called the market clearing price because there is neither excess demand nor supply. In this way, well-being to society is maximized because consumers who value a good the highest get to purchase it, and the producers who sell it have the lowest costs of production.
When a surplus exists, the price of a good is greater than the equilibrium price. In this condition, the quantity supplied by sellers exceeds the quantity demanded by buyers, and buyers do not demand as much as sellers are willing to sell. In a shortage condition, the price of a good is lower than the equilibrium price. When this occurs, the quantity demanded of a good exceeds the quantity supplied, and producers do not supply enough to meet the quantity demanded.

2. In the case of shortage, how does the market return to equilibrium?
When a shortage of a good exists, not all buyers who ...

Solution Summary

The determinants of supply and demand are clearly identified.