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Chapter 4

Chapter 5

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Microeconomics

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Yg bhyghtb fChapter 4

Market Equilibrium

Summary

 Market equilibrium is achieved when D = S

 What if market is not in equilibrium?

o When D ≠ S, it is called disequilibrium / market failure

o Any point other than the equilibrium point = disequilibrium

 How to solve issue of disequilibrium / market failure:

o Let the market solves itself (price mechanism based on invisible hand by Adam

Smith)

 Price mechanism: when market is in disequilibrium, the interaction

between consumers and producers will adjust the price and quantity back

to the equilibrium point

 Scenario 1: price is above the market / equilibrium price

o Using the diagram above, market price = $3. If P > $3, market is having a

surplus / excess supply

o

o At such a high price (P = $5), consumers want lower quantity demanded (recall:

law of demand: P increases → Q demanded decreases)

o Producers want higher quantity supplied (recall: law of supply: P increases → Q

supplied increases).

o Qs > Qd = surplus / excess supply.

o Surplus / excess supply → sellers have many unsold goods → sellers lower price

to attract consumers to buy unsold goods → price decreases

o

 Scenario 2: price is below the market / equilibrium price

o Using the diagram above, market price = $3. If P < $3, market is having a

shortage / excess demand

o

o At such a low price (P = $1), consumers want higher quantity demanded (recall:

law of demand: P decreases → Q demanded increases)

Tutorial Answer

Question 1

 Because Coke and Pepsi are substitutes, a decrease in the price of Pepsi will cause the

demand for Coke to decrease. This initial shift in demand for Coke results in a lower

price for Coke. – TRUE

 This lower price will cause the demand curve for Coke to shift to the left. – FALSE

Question 2

a)

 Demand increases → D curve shifts to the right

 Supply decreases → S curve shifts to the left

 Supply decreases more than increase in demand

 P increases to P

 Q reduces to Q

D 2

D 1

S 1

S 2

Q 2 Q 1

P 1

P 2

b)

 Demand decreases → D curve shifts to the left

 Supply increases → S curve shifts to the right

 Shift in D more than shift in S

 P decreases to P

 Q decreases to Q



Question 3

a)

 Demand increases → D curve shifts to the right

 P increases to P

 Q increases to Q

D 1

D 2

S 2

S 1

Q 2 Q 1

P 2

P 1

 Demand increases → D curve shifts to the right

 P increases to P

 Q increases to Q

e)

 Demand decreases → D curve shifts to the left

 P decreases to P

 Q decreases to Q

Question 4

a)

 At equilibrium, D = S and Qd = Qs

 20 - 2P = 5 + 3P

 5P = 15; P = 3

 Qd = 20 - 2P = 20 – 2(3) = 14

b)

 At equilibrium, D = S and Qd = Qs

 100 - 5P = 25 + 10P

 15P = 75; P = 5

 Qd = 100 - 5P = 100 – 5(5) = 75

Question 5

Price

(dollars per unit)

Quantity Demanded

(units per day)

Quantity Supplied

(units per day)

Surplus/Shortage/

Equilibrium

(indicate the

values of each)

15 50 35 Shortage – 15

16 48 38 Shortage – 10

17 46 41 Shortage – 5

18 44 44 Equilibrium – no

(0) shortage &

surplus

19 42 47 Surplus – 5

20 40 50 Surplus – 10

21 38 53 Surplus – 15

22 36 56 Surplus – 20

Multiple Choice

Multiple Choice

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Chapter 4 Course: Microeconomics

5 Documents

Students shared 5 documents in this course

University: Taylor's University Lakeside Campus

Multiple Choice

Multiple Choice

Was this document helpful?

Yg bhyghtb fChapter 4

Market Equilibrium

Summary

Market equilibrium is achieved when D = S

What if market is not in equilibrium?

oWhen D ≠ S, it is called disequilibrium / market failure

oAny point other than the equilibrium point = disequilibrium

How to solve issue of disequilibrium / market failure:

oLet the market solves itself (price mechanism based on invisible hand by Adam

Smith)

Price mechanism: when market is in disequilibrium, the interaction

between consumers and producers will adjust the price and quantity back

to the equilibrium point

Scenario 1: price is above the market / equilibrium price

oUsing the diagram above, market price = $3. If P > $3, market is having a

surplus / excess supply

oAt such a high price (P = $5), consumers want lower quantity demanded (recall:

law of demand: P increases → Q demanded decreases)

Chapter 4

Microeconomics

Taylor's University Lakeside Campus

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Preview text

Yg bhyghtb fChapter 4

Market Equilibrium

Summary

 Market equilibrium is achieved when D = S

 What if market is not in equilibrium?

o When D ≠ S, it is called disequilibrium / market failure

o Any point other than the equilibrium point = disequilibrium

 How to solve issue of disequilibrium / market failure:

o Let the market solves itself (price mechanism based on invisible hand by Adam

Smith)

 Price mechanism: when market is in disequilibrium, the interaction

between consumers and producers will adjust the price and quantity back

to the equilibrium point

 Scenario 1: price is above the market / equilibrium price

o Using the diagram above, market price = $3. If P &gt; $3, market is having a

surplus / excess supply

o

o At such a high price (P = $5), consumers want lower quantity demanded (recall:

law of demand: P increases → Q demanded decreases)

o Producers want higher quantity supplied (recall: law of supply: P increases → Q

supplied increases).

o Qs &gt; Qd = surplus / excess supply.

o Surplus / excess supply → sellers have many unsold goods → sellers lower price

to attract consumers to buy unsold goods → price decreases

o

o

 Scenario 2: price is below the market / equilibrium price

o Using the diagram above, market price = $3. If P &lt; $3, market is having a

shortage / excess demand

o

o At such a low price (P = $1), consumers want higher quantity demanded (recall:

law of demand: P decreases → Q demanded increases)

Tutorial Answer

Question 1

 Because Coke and Pepsi are substitutes, a decrease in the price of Pepsi will cause the

demand for Coke to decrease. This initial shift in demand for Coke results in a lower

price for Coke. – TRUE

 This lower price will cause the demand curve for Coke to shift to the left. – FALSE

Question 2

a)

 Demand increases → D curve shifts to the right

 Supply decreases → S curve shifts to the left

 Supply decreases more than increase in demand

 P increases to P

 Q reduces to Q

D 2

D 1

S 1

S 2

Q 2 Q 1

P 1

P 2

b)

 Demand decreases → D curve shifts to the left

 Supply increases → S curve shifts to the right

 Shift in D more than shift in S

 P decreases to P

 Q decreases to Q



Question 3

a)

 Demand increases → D curve shifts to the right

 P increases to P

 Q increases to Q

D 1

D 2

S 2

S 1

Q 2 Q 1

P 2

P 1

 Demand increases → D curve shifts to the right

o Using the diagram above, market price = $3. If P > $3, market is having a

o Qs > Qd = surplus / excess supply.

o Using the diagram above, market price = $3. If P < $3, market is having a

(0) shortage &