Question

QUESTION 1 20 mice 1 2 3 4 5 6 quantity Refer to the graph above and answer the following questions: • What will happen if the current price is set at $12 per unit and why? • What will happen if the current price is set at $4 per unit and why? • What will happen if the current price is set at $10 per unit and why? • If the demand curve shifts to the left (assuming no change in supply) then what will happen to the equilibrium price and equilibrium quantity? Why?

Answer 1

The given is a demand and supply curve , in a free market economy the price of a product is determined where the demand and the supply were equal. In this given graph the equilibrium price is $10 and quantity is 2.5.

1). If the price were set at $12 there would be surplus for the product, at $12 the quantity supplied is greater than the quantity demanded. This is because at higher price the sellers have the incentive to supply more to the market , at higher prices the profit margin is high so they supply more to the market. For the consumers they reduce their quantity demaded at a higher price.

2). The price $4 is well below the equilibrium price so there would be a shortage for the product. At. a lower price the consumers tend to demand more and the sellers have no incentive supply more so there is a shortage.

3). At the price $10 there is neither a shortage or surplus , the market is in equilibrium. The quantiy demanded is exactly equal to the quantity supplied.

4). If the demand curve shifts to the left that is an decrease in demand so as the demand curve shifts to the left  the equilibrium price and the quantity will fall. There can be a number of reasons for the leftward shift of the demand curve such as the decrease in income or wealth, decrease in the price of substitute good, changes in tastes and preferences etc......