a. What is the equilibrium price of hot dogs? What makes you think so?
According to the definition, the equilibrium price is the price at which quantity supplied equals quantity demanded. From the table we can see that at $1.60, Qs = Qd = 2,400. Therefore $1.60 is the equilibrium price.
b. If the organizers of the sporting event decide to set the price at 1.80, how many hot dogs will be sold?
At $1.80, 4,800 hot dogs will be offered for sale, but only 1,600
will be demanded. Therefore, only 1,600 hot dogs will be sold.
2. True or False? Explain.
In economics, "normal good" is the name for a good a normal individual can afford.
False. The expression "normal good" means that when a person's income increases, the consumption of that good also increases.
3. a. State the Law of Demand.
As the price of a good rises, all other things being equal, the quantity demanded of that good falls.
b. Over the last two decades, tuition fees at Purdue University have increased by 50%. At the same time, the number of students enrolled has increased from 22,000 to over 35,000.
Does this example demonstrate that the Law of Demand is false? Explain why or why not. Use graphs.
No, this fact does not refute the Law of Demand. The Law of Demand tells us what will happen to quantity demanded if price is the only factor that changes. In the
example provided, many things have probably changed over twenty years, average family income and the reputation of the school being just two of them. As a result, the demand for the services provided by that university has shifted. See graph.
4. The total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as follows:
Thousands of bushels | Price per bushel, $ | Thousands of bushels supplied | Surplus (+) |
85 | 3.40 | 72 | - 13 |
80 | 3.70 | 73 | - 7 |
75 | 4.00 | 75 | 0 |
70 | 4.30 | 77 | + 7 |
65 | 4.60 | 79 | + 14 |
60 | 4.90 | 81 | + 21 |
a. Market equilibrium occurs at the point where market clears, that is, where quantity supplied is equal to quantity demanded. In other words, equilibrium price is the price at which there exists neither surplus nor shortage. Looking at the entries in the last column (in bold), we can see the equilibrium price is $4. Therefore, the equilibrium quantity is 75,000 bushels.
b. For your individual work.
c. At $3.40, there would be a 13,000 bushels
shortage of wheat. The price will not stay at that level since it will be in the sellers' best interest to raise their prices.
At $4.90, sellers will supply 21,000 bushels more than buyers would demand, thus creating a surplus. In order to get rid of the surplus, sellers would have to decrease their price.
d. The statement is false. A surplus means that at a given price, quantity supplied is greater than quantity demanded. Trying to get rid of the surplus, sellers will decrease their prices. Therefore, surpluses drive prices down, not up. Shortages, on the other hand, give sellers the opportunity to raise prices, hence "shortages drive prices up".
e. A ceiling at $3.70 established by the government (which probably tries to prevent the price from being what it perceives as "too high") would not allow the price to move towards the equilibrium. As a result, a permanent shortage of wheat will emerge. Buyers will demand 7000 more bushels of wheat than
there is available.
Demand and Supply models are very easy to use, when there is a change in either demand or supply. However, in reality, there are number of situations which lead to simultaneous changes in both demand and supply.
(I) Both Demand and Supply decrease
(II) Both Demand and Supply increase
(III) Demand decreases and Supply increases
(IV) Demand increases and Supply decreases
Let’s relate this to ridesharing businesses — Uber, Lyft, Ola — where the simultaneous shifts are seen in action. In the case of ridesharing businesses, the demand is the number of riders (Q) and the supply is the number of drivers (S).
(I) Both Demand and Supply Decrease:
Original Equilibrium is determined at point E, when the original demand curve DD and the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the equilibrium price. The effect of decrease in both demand and supply on equilibrium price and equilibrium quantity can be better analyzed under three different cases:
Case 1: Decrease in Demand = Decrease in Supply:
When decrease in demand is proportionately equal to decrease in supply, then leftward shift in demand curve from D to D¹ is proportionately equal to leftward shift in supply curve from SS to S¹S¹ . The new equilibrium is determined at E¹ As demand and supply decrease in the same proportion, equilibrium price remains same at OP, but equilibrium quantity falls from OQ to OQ¹.
Impact: No change in Price for Riders. No change in Earnings for Drivers
Case 2: Decrease in Demand > Decrease in Supply:
When decrease in demand is proportionately more than decrease in supply, then leftward shift in demand curve from D to D¹ is proportionately more than leftward shift in supply curve from S to S¹. The new equilibrium is determined at E¹, equilibrium price falls from OP to OP¹ and equilibrium quantity falls from OQ to OQ¹.
Impact: Drop in Price for Riders. Drop Earnings for Drivers
Case 3: Decrease in Demand < Decrease in Supply:
When decrease in demand is proportionately less than decrease in supply, then leftward shift in demand curve from D to D¹ is proportionately less than leftward shift in supply curve from S to S¹. The new equilibrium is determined at E¹ equilibrium price rises from OP to OP¹ whereas, equilibrium quantity falls from OQ to OQ¹.
Impact: Increase in Price for Riders. Increase in Earnings for Drivers
(II) Both Demand and Supply Increase:
Original Equilibrium is determined at point E, when the original demand curve DD and the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the equilibrium price. The effect of increase in both demand and supply on equilibrium price and equilibrium quantity is discussed under three different cases:
Case 1: Increase in Demand = Increase in Supply:
When increase in demand is proportionately equal to increase in supply, then rightward shift in demand curve from D to D1 is proportionately equal to rightward shift in supply curve from S to S¹. The new equilibrium is determined at E¹. As both demand and supply increase in the same proportion, equilibrium price remains the same at OP, but equilibrium quantity rises from OQ to OQ¹.
Impact: No change in Price for Riders. No change in Earnings for Drivers
Case 2: Increase in Demand > Increase in Supply:
When increase in demand is proportionately more than increase in supply then rightward shift in demand curve from D to D¹ is proportionately more than rightward shift in supply curve from SS to S1S1. The new equilibrium is determined at E1equilibrium price rises from OP to OP¹ and equilibrium quantity rises from OQ to OQ¹.
Impact: Increase in Price for Riders. Increase in Earnings for Drivers
Case 3: Increase in Demand < Increase in Supply:
When increase in demand is proportionately less than increase in supply, then rightward shift in demand curve from D to D¹ is proportionately less than rightward shift in supply curve from S to S¹. The new equilibrium is determined at E¹ equilibrium price falls from OP to OP¹ whereas, equilibrium quantity rises from OQ to OQ¹.
Impact: Decrease in Price for Riders. Decrease in Earnings for Drivers
(III) Demand decreases and Supply increases:
The effect of simultaneous decrease in demand and increase in supply on equilibrium price and equilibrium quantity is analyzed in the following three cases:
Case 1: Decrease in Demand = Increase in Supply:
Impact: Decrease in Price for Riders. Decrease in Earnings for Drivers
Case 2: Decrease in Demand > Increase in Supply:
Impact: Greater decrease in Price for Riders. Greater decrease in Earnings for Drivers
(IV) Demand increases and Supply decreases:
The effect of increase in demand and decrease in supply on equilibrium price and equilibrium quantity is discussed in the following three cases:
Case 1: Increase in demand = Decrease in supply:
Impact: Increase in Price for Riders. Increase in Earnings for Drivers
Case 2: Increase in Demand > Decrease in Supply:
Impact: Greater increase in Price for Riders. Greater increase in Earnings for Drivers
Case 3: Increase in Demand < Decrease in Supply:
Impact: Increase in Price for Riders. Increase in Earnings for Drivers
In this article, we just looked at the different possibilities of changes in supply and demand, and the impact on the pricing and earnings. In the next article, we look at levers such as surge pricing and incentives, which act as levers to adjust both supply and demand.