Question

12: Market equilibrium and disequilibrium

The following graph shows the monthly demand and supply curves in the market for hats. 

Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. 

Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly.

The equilibrium price in this market is $_______  per hat, and the equilibrium quantity is _______ hats bought and sold per month. 

Complete the following table by indicating at each price whether there is a shortage or surplus in the market, the amount of that shortage or surplus, and whether this places upward or downward pressure on prices. 

Answer 1

The graph indicates that at the price of $30 per hat, the actual quantity demanded is 500 hats.
However, the supply is 210 hats at that price. This indicates a shortage of 290 hats.

The equilibrium price is the function of market forces such as supply and demand. In the market with no outside intervention, the buyers and suppliers exchange goods or services. The price of that good which agreeable to both parties and which corresponds the quantity which is equal in the context of demand and supply is known as the equilibrium point.

The above graph indicates that the equilibrium price in the market is $50 and equilibrium quantity is 250 hats.
It is the point where supply curve intersects with the demand curve.

At $30 demand is 500 and supply is 210 while equilibrium price is $50 and quantity 250
(50 - 30) / 2 = 20
(500 - 250) / 2 = 125
The supply will rise by 20 hats per $10 increase.
The demand will fall by 125 hats per $10 increase.

a) At the market price of $40 the demand will be of 375 hats and supply will be 230 hats.
It means there will be a shortage of 145 hats and price pressure will be in upward direction.

b) At the market price of $60 the demand will be of 125 hats and supply will be 270 hats.
It means there will be a surplus of 145 hats and the price will witness a downward pressure.