Chapter 3: Problem 18

If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below the equilibrium level, would you predict a surplus or a shortage? Why?

Short Answer

Expert verified

In short, when the price is above the equilibrium level, there is a surplus due to the decreased demand and increased supply. Conversely, when the price is below the equilibrium level, there is a shortage because the increased demand exceeds the reduced supply. This occurs as the price level influences consumer and producer behaviors regarding the quantity demanded and supplied.

Step by step solution

Define Equilibrium, Surplus, and Shortage

Equilibrium is the point where supply and demand in the market are equal. In other words, the amount of goods and services demanded by consumers exactly matches the amount supplied by producers at a specific price level. Surplus occurs when the quantity supplied is greater than the quantity demanded. In this situation, the market price is above the equilibrium level, leading to an excess of goods or services available. Shortage occurs when the quantity demanded is greater than the quantity supplied. In this situation, the market price is below the equilibrium level, leading to a scarcity of goods or services available.

Situation 1: Price above the Equilibrium level

Let's analyze the situation when the price is above the equilibrium level. In this case, the high price decreases the demand for the product, and consumers are willing to buy a lesser quantity. On the other hand, producers are willing to produce and supply more of the product due to the high price. Hence, the quantity supplied is greater than the quantity demanded. As the quantity supplied exceeds the quantity demanded, this leads to an excess of goods or services in the market, known as a surplus. Thus, when the price is above the equilibrium level, we predict a surplus.

Situation 2: Price below the Equilibrium level

Now let's analyze the situation when the price is below the equilibrium level. In this case, the low price increases the demand for the product, and consumers are willing to buy a larger quantity. However, producers are unwilling to produce and supply more at the lower price. Hence, the quantity demanded is greater than the quantity supplied. As the quantity demanded exceeds the quantity supplied, this leads to a scarcity of goods or services in the market, known as a shortage. Thus, when the price is below the equilibrium level, we predict a shortage.

Conclusion

In conclusion, when the price is above the equilibrium level, it leads to a surplus, while when the price is below the equilibrium level, it leads to a shortage. This is because the price level influences the quantity demanded and the quantity supplied. A higher price makes consumers buy less, and producers produce more, resulting in a surplus. A lower price makes consumers buy more, but producers produce less, resulting in a shortage.

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