How do you determine if there is a shortage or surplus without given supply and demand curves? The question I was given is: Assume that the equilibrium price for a good is $7 and the equilibrium...
How do you determine if there is a shortage or surplus without given supply and demand curves? The question I was given is:
Assume that the equilibrium price for a good is $7 and the equilibrium quantity is 100 units per week. At a price of $4:
a. there would be a surplus
b. quantity supplied would be greater than quantity sold
c. quantity demanded would be greater than quantity sold
d. quantity sold would be less than quantity purchased
e. none of the above
The correct answer to this question is Option C. A price that is set below the equilibrium price results in a quantity demanded that is greater than the quantity supplied. This is the definition of a shortage. You can figure this out either by making your own supply and demand graph or by thinking it through.
If you draw a supply and demand graph, you will be able to see that C is the correct answer. Your demand curve will start in the upper left (low price, high quantity demanded) and slope down to the bottom right corner (high price, low quantity demanded). Your supply curve will start in the bottom left (low price, low quantity supplied) and slope upward to the upper right corner (high price, high quantity supplied). The point where they cross is the equilibrium. The y-axis is the price. If you draw a horizontal line across the graph below the equilibrium, you will be showing what happens if the price of the good is set below the equilibrium (as is the case in this question). You will see that it crosses the supply curve at a lower quantity than the point where it crosses the demand curve. This shows that the quantity demanded is greater than the quantity supplied. Because suppliers control how much of the product is put out for sale, the quantity demanded is higher than the quantity sold and C is the correct answer.
If you think about it, you will also realize that C is correct. We know that people are willing and able to buy more of a product as the price drops. That means more people will want to buy the product at $4 than at $7. We know that producers are willing and able to supply less of the product as the price drops. That means producers will not make as much of a product when it sells for $4 as they would if it sold for $7. Therefore, when equilibrium price is $7 and the price is set at $4, there will be a higher quantity demanded and a lower quantity supplied. Suppliers would not supply as much, and so the quantity demanded would be higher than the quantity that was actually sold. Again, the answer is C.
For these reasons, the correct answer to this question is Option C.