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ECON: MICRO4 (New, Engaging Titles...

4th Edition
William A. McEachern
ISBN: 9781285423548

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BuyFindarrow_forward

ECON: MICRO4 (New, Engaging Titles...

4th Edition
William A. McEachern
ISBN: 9781285423548
Textbook Problem

(Equilibrium) Assume the market for corn is depicted as in the table that appears below.

a. Complete the table below.

b. What market pressure occurs when quantity demanded exceeds quantity supplied? Explain.

c. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain.

d. What is the equilibrium price?

e. What could change the equilibrium price?

f. At each price in the first column of the table below, how much is sold?

Price per Bushel Quantity Demanded (millions of bushels) Quantity Supplied(millions of bushels) Surplus/ Shortage Will Price Rise or Fall?
$1.80 320 200 ______ ______
2.00 300 230 ______ ______
2.20 270 270 ______ ______
2.40 230 300 ______ ______
2.60 200 330 ______ ______
2.80 180 350 ______ ______

To determine

The market equilibrium quantity and price for corn and assess its shortage and surplus at the disequilibrium

Concept Introduction

Market equilibrium- The price and output combination where the quantity demanded equals the quantity supplied is known as the market equilibrium. Graphically it is the point of interaction of the demand and supply curve.

Market clearing price- The price at the market equilibrium is known as the market clearing price as any shortage or surplus existent at other prices are cleared or eliminated at this price.

Explanation

Part (a)

The completed table is given below

Price per Bushel ($) Quantity Demanded (Millions of bushels) Quantity Supplied (millions of bushels) Surplus/Shortage Will Price rise or fall Quantity Sold (Answer f)
1.80 320 200 Shortage 120 Rise 200
2.00 300 230 Shortage 70 Rise 230
2.20 270 270 No shortage pr Surplus- Equilibrium Market clearing price- No change 270
2.40 230 300 Surplus 70 Fall 230
2.60 200 330 Surplus 130 Fall 200
2.80 180 350 Surplus 170 Fall 180

Part (b)

Refer to the graph below

Assume the graphical illustration to be depictive of the corn market as presented in the table above. A shortage in the market implies an excess demand for corn over its supply. At price P1 in the graph, it can be seen that Demand Q2 > Supply Q1. This is so because the market price is too low and more buyers enter the market increasing the demand. On the other hand, the supply remains fairly low as the lower prices discourage suppliers due to lower profits. The shortage so created force the buyers to bid for higher prices pushing up the demand. The market pressure on price thus leads to demand and supply adjustment. In the table above, at prices $1.80 and $2.00 demand exceeds supply creating a shortage of 120 million and 70 millions of bushels respectively...

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