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Chapter 3: Problem 3

What happens in a market if the current price is above the equilibrium price? What happens if the current price is below the equilibrium price?

Short Answer

Expert verified
If the current price is above the equilibrium price, there will be a surplus (excess supply) and prices will decrease. If the current price is below the equilibrium price, there will be a shortage (excess demand) causing prices to rise.

Step by step solution

01

Understand The Effect Of A Price Higher Than Equilibrium

When the current price in a market is above the equilibrium price, which is also known as a surplus, there will be an excess supply. This happens because at a higher price, consumers demand less of the product, while producers are willing to supply more.
02

Impact Of Surplus On Market

This surplus of goods will force suppliers to lower their prices in order to sell their products. Also, competition among suppliers may increase, potentially driving down the price further. As the price decreases, consumers will start to demand more of the product, which will gradually reduce the excess supply.
03

Analyze The Effect Of A Price Lower Than Equilibrium

When the current price in a market is below the equilibrium price, which is referred to as a shortage, there is excess demand. At a lower price level, consumers demand more of a product, while producers are less willing to supply it.
04

Impact Of Shortage On Market

The excess demand or shortage pressures suppliers to increase their prices. As the price increases, the quantity demanded by consumers will decrease, and suppliers will be more willing to produce and supply the product, gradually reducing the excess demand. The price will continue to rise until it reaches the equilibrium level where supply equals demand.

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Most popular questions from this chapter

[Related to Solved Problem 3.4 on page 94] According to one observer of the lobster market: "After Labor Day, when the vacationers have gone home, the lobstermen usually have a month or more of good fishing conditions, except for the occasional hurricane." Use a demand and supply graph to explain whether lobster prices are likely to be higher or lower during the fall than during the summer.

A news article about virtual reality headsets observed, "For any hardware platform, it is critical to attract outside developers and build a virtuous cycle in which popular software titles drive hardware sales, which in turn brings in more software developers." The article referred to two types of software: games, such as Final Fantasy, that were already available for video game consoles, and software intended only for use with virtual reality headsets. As both these types of software become available, are they likely to make virtual reality headsets closer or less close substitutes for video game consoles? Briefly explain. Source: Takashi Mochizuki, "Sony's Virtual-Reality Headset Confronts Actual Reality of Modest Sales," Wall Street Journal, February 27 , 2017

What are the main variables that will cause the demand curve to shift? Give an example of each.

Related to the Apply the Concept on page 81\(]\) An article on marketwatch.com stated, "While the fizzy soda drinks companies have experienced an annual volume sales decline since \(2003,\) bottled water grew every year over the last two decades, except 2009 during the depths of the Great Recession." a. What factors have caused a decline in sales of carbonated ("fizzy") beverages? Is it likely that those factors will lead to further declines in demand in the future? Briefly explain. b. Why might sales of bottled water be likely to decline during a recession, when employment and household incomes fall? Would sales of premium bottled water be likely to decline by more or by less during a recession than sales of regular bottled water? Briefly explain.

What is the difference between a change in supply and a change in quantity supplied?
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