Question

The table below shows information about the market for macroeconomic textbooks in Pittsburgh, Pennsylvania. Notice: “Q^D” means quantity demanded, and “Q^S” means quantity supplied (at different prices). You will use the information in the table below to answer questions 1, 2 and 3.

Price	QD	QS
1	70,000	10,000
2	60,000	15,000
3	50,000	20,000
4	40,000	25,000
5	30,000	30,000
6	20,000	35,000
7	10,000	40,000
8	0	45,000

If the current price in the market was P=3,

a) Would there be an excess supply or an excess demand for textbooks? (2.5 POINTS)
b) How much would it be? (2.5 POINTS)
c) Will the price then drop or increase? (2.5 POINTS)
d) What is the economic intuition behind the price change? Explain. (2.5 POINTS)

Answer 1

a) If the current market price is 3, there will be excess demand in the market for textbooks as at price 3, the quantity demanded is 50,000 and quantity supplied is only 20,000.

b) The excess demand will be of 30,000 textbooks (50000-20000).

c) Since there is excess demand in the market the price will increase to restore the market equilibrium.

d)Here the market price is less than the equlibrium market price and as a result demand exceeds supply. With excess demand consumers start bidding high for textbooks and this leads to a rise in the price of textbooks. With rise in price of textbooks quantity supplied increases and quantity demanded starts falling restoring equilibrium price and quantity in the market.