Question

Section 2: Supply and Demand Model and PPF

This section deals with the Production Possibility Frontier and market forces of supply and demand models, as well as, the impacts of government policies on the interactions of supply and demand in the market economy.

1. Given the table below, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity.

Price	Quantity Demanded Per Month	Quantity Supplied Per Month
$5	6,000	10,000
$4	8,000	8,000
$3	10,000	6,000
$2	12,000	4,000
$1	14,000	2,000

a.   What are the equilibrium price and the equilibrium quantity?

b.   Suppose the price is currently $5. Explain what problem would exist in the market and calculate the size of that problem. What would you expect to happen to price?

c.   Suppose the price is currently $2. Explain what problem would exist in the market and calculate the size of the problem. What would you expect to happen to price?

Answer 1

1.Ans: The following figure shows the demand and supply curves for flashlights.

a) Ans: The equilibrium price is $4 and the equilibrium quantity is 8,000

Explanation:

At equilibrium price , Qd = Qs

b) Ans:

At price $5 , there is surplus in the market becuase Qs is greater than Qd.

Surlus quantity = 10,000 - 6,000 = 4,000

When Qs > Qd , then there will be a downward pressure on price. It means price will decrease.

c) Ans:

At price $2 , there is shortage in the market becuase Qd is greater than Qs.

Shortage quantity = 12,000 - 4,000 = 8,000

When Qd > Qs , then there will be an upward pressure on price. It means price will increase.