## Quiz 3 :

Demand, Supply, and Market Equilibrium

Answer:

Preset prices are imaginary prices determined without considering the market demand for the product. The prices often do not match the market equilibrium and hence result in a shortage or surplus.

In the case of movie tickets, the prices are fixed estimating the demand. If the movie makes a positive review, it may result in a shortage. Conversely, if it makes a negative review, it results in surplus. However, in the case of gasoline, customers tend to search for alternative fuels and alternative modes of transport thus creating shortage and surplus.

_{1}, the equilibrium quantity is 7000 gallons per month. When demand is D 2 and supply is S

_{1}, the equilibrium price is $3.00 per gallon. When demand is D 2 and supply is S

_{1}, there is an excess demand of 4000 gallons per month at a price of $1.00 per gallon. If demand is D 1 and supply is S

_{2}, the equilibrium quantity is 8000 gallons per month. b. Compare two equilibriums. In the first, demand is D 1 and supply is S

_{1}. In the second, demand is D 1 and supply is S

_{2}. By how much does the equilibrium quantity change? By how much does the equilibrium price change? c. If supply falls from S

_{2}to S

_{1}while demand declines from D 2 to D 1, does the equilibrium price rise or fall or stay the same? What if only supply falls? What if only demand falls? d. Suppose that supply is fixed at S

_{1}and that demand starts at D 1. By how many gallons per month would demand have to increase at each price level such that the equilibrium price per gallon would be $3.00? $4.00?

Answer:

a. The table below shows the corresponding numbers.

Since demand and supply must equal at the equilibrium price, only the third row fulfills this requirement. When demand is D2 and Supply is S1, the equilibrium quantity is 8,000, and the corresponding price is given, $3.

b. In the case of D1 and S1 the equilibrium is 7,000 at $2. In the case of D1 and S2, the equilibrium is 8,000 at $1. The quantity increases by 1,000 and the price decreases by $1.

c. In the case of D2 and S2 the original equilibrium is 8,500 at $2. In the case of D1 and S1, the equilibrium is 7,000 at $2. The quantity decreases by 1,500 and the price increases by $1.

In the case of D1 and S2, the equilibrium is 8,000 at $1. Compared to the case of D2 and S2, quantity decreases from 8,500 to 8,000 and price decreases from $2 to $1.

In the case of S1 and D2, the equilibrium is 8,000 at $3. Compared to the case of D2 and S2, quantity decreases from 8,500 to 8,000 and price increases from $2 to $3.

d. When supply is S1 and demand is D1, at price $3 the supply is 8,000. At equilibrium demand must also be 8,000. The original demand is 6,000. Thus demand has to increase by 2,000 for $3 and 8,000 to be equilibrium.

When supply is S1 and demand is D1, at price $4 the supply is 9,000. At equilibrium demand must also be 9,000. The original demand is 5,000. Thus demand has to increase by 4,000 for $3 and 8,000 to be equilibrium.

Answer:

First we solve for the demand and supply in terms of price.

Next we equate demand and supply to solve for price.

Lastly we substitute equilibrium price into demand or supply to solve for equilibrium quantity.

_{1}, for Drop Volley tennis, a producer of tennis equipment. Use the figure and the table below to give your answers to the following questions. a. Use the figure to fill in the quantity supplied on supply curve S

_{1}for each price in the table below. b. If production costs were to increase, the quantities supplied at each price would be as shown by the third column of the table (" S

_{2}Quantity Supplied"). Use that data to draw supply curve S

_{2}on the same graph as supply curve S

_{1}. c. In the fourth column of the table, enter the amount by which the quantity supplied at each price changes due to the increase in product costs. (Use positive numbers for increases and negative numbers for decreases.) d. Did the increase in production costs cause a "decrease in supply" or a "decrease in quantity supplied"?