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Chapter 3: Q.18 (page 78)

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

If prices are above the equilibrium level, there would be surplus

and if the price is below the equilibrium level, there would be a shortage.

Step by step solution

01

Step 1.If prices are above equilibrium level(supply exceeds quantity demanded)

Explanation:

When prices are above the equilibrium level, increased prices will be profitable for firms to produce more. Producers expand production & supply and the quantity demanded will decrease at a higher price.

02

Step 2.If prices are below equilibrium level(quantity demanded exceed supply)

Explanation:

When the prices are below the equilibrium level, there will be a shortage. At lower prices, buyers' purchases increase. Producers however are producing less because of lowered profits.

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Most popular questions from this chapter

What is the relationship between quantity

demanded and quantity supplied at equilibrium? What is

the relationship when there is a shortage? What is the

relationship when there is a surplus?

If a price floor benefits producers, why does a price floor reduce social surplus?

What is total surplus? How is it illustrated on a

demand and supply diagram?

What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?

Explain why the following statement is false: “In the goods market, no buyer would be willing to pay

more than the equilibrium price.”
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