3. Using the following schedule, define the equilibrium price and quantity.
Describe the situation at a price of $10. What will occur? Describe the situation at a price of $2. What will occur?
Price Quantity Demanded Quantity Supplied
$1 500 100
$2 400 120
$3 350 150
$4 320 200
$5 300 300
$6 275 410
$7 260 500
$8 230 650
$9 200 800
$10 150 975
Equilibrium occurs when quantity demanded equals quantity supplied.
In this schedule it occurs when the price is $5, and the quantity demanded equals quantity supplied,
that is 300. When the price is $10, there will be excess supply (975) and very small demand (150)
leading to a surplus in the market. The surplus can fall only when producers start charging lower
prices to get rid of their inventories. This process will continue till the prices converge to $5. If the
price is $2 then we have the opposite situation: very high demand (400) and very small supply (120).
Thus we will have a shortage in the market, and consumers will be willing to pay a higher price.
The price will therefore rise till it reaches the equilibrium price of $5.
Any price less than $5 will be a effective price ceiling. If the ceiling is set at $2,then we have very high demand (400) and very small supply (120). Thus we will have a shortage in the market, and consumers will be willing to pay ...
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