Chapter 03 – Demand, Supply, and Market Equilibrium
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(b)
Feedback: Consider the following data.
(a) Pe = $4.00. Equilibrium occurs where there is neither a shortage nor surplus of wheat.
Chapter 03 – Demand, Supply, and Market Equilibrium
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(b)
(c) Note: shortages will be negative and surpluses will be positive. At the price $3.40
there will be a 13,000 bushel shortage (= 72,000 – 85,000 = -13,000). At the price of
4. How will each of the following changes in demand and/or supply affect equilibrium price and
equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain
unchanged, or are the answers indeterminate because they depend on the magnitudes of the
shifts? Use supply and demand to verify your answers. LO5
a. Supply decreases and demand is constant.
b. Demand decreases and supply is constant.
c. Supply increases and demand is constant.
d. Demand increases and supply increases.
e. Demand increases and supply is constant.
f. Supply increases and demand decreases.
g. Demand increases and supply decreases.
h. Demand decreases and supply decreases.
Chapter 03 – Demand, Supply, and Market Equilibrium
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Answers:
Feedback:
Part a: The decrease in supply with a constant demand results in an increase in
equilibrium price and a decrease in equilibrium quantity as shown in the figure below.
Price
Quantity
S2
S1
D1
P1
P2
Q2
Chapter 03 – Demand, Supply, and Market Equilibrium
Price
Quantity
S1
D1
P1
P2
Q2
D2
Quantity
S1
P1
Chapter 03 – Demand, Supply, and Market Equilibrium
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Part e: The increase in demand with a constant supply results in an increase in
equilibrium price and an increase in equilibrium quantity as shown in the figure below.
Price
Quantity
S1
D1
P1
P2
Q2
D2
Price
Quantity
S2
S1
D1
P1
P2
Q2
D2
Chapter 03 – Demand, Supply, and Market Equilibrium
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Part f: The increase in supply and the decrease in demand unambiguously decreases the
equilibrium price. This is because the increase in supply and the decrease in demand both
put downward pressure on the equilibrium price. However, the change in equilibrium
quantity is indeterminate because the increase in supply increases the equilibrium
quantity and the decrease in demand decreases the equilibrium quantity. The figure below
shows these effects when the supply effect dominates.
Part g: The decrease in supply and the increase in demand unambiguously increases the
equilibrium price. This is because the decrease in supply and the increase in demand both
put upward pressure on the equilibrium price. However, the change in equilibrium
quantity is indeterminate because the decrease in supply decreases the equilibrium
quantity and the increase in demand increases the equilibrium quantity. The figure below
shows these effects when the demand effect dominates.
Price
Quantity
S2
S1
D1
P1
P2
Q2
D2
Chapter 03 – Demand, Supply, and Market Equilibrium
Part h: The decrease in supply and the decrease in demand unambiguously decreases the
equilibrium quantity. This is because the decrease in supply and the decrease in demand
both decrease the equilibrium quantity. However, the change in equilibrium price is
indeterminate because the decrease in supply puts upward pressure on the equilibrium
price and the decrease in demand puts downward pressure on the equilibrium price. The
figure below shows these effects when the supply effect dominates.
Price
Quantity
S2
S1
D1
P1
Q1
P2
Q2
D2
Price
Quantity
S2
S1
D1
P1
P2
Q2
D2
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5. Use two market diagrams to explain how an increase in state subsidies to public colleges might
affect tuition and enrollments in both public and private colleges. LO5
Feedback: Consider the case of subsidies to public colleges. The state subsidies to public
colleges shift the supply curve of the public colleges to the right, thus reducing tuition
Now consider a tax on private colleges. This will reduce the supply of private colleges
6. ADVANCED ANALYSIS Assume that demand for a commodity is represented by the
equation P = 10 – .2Qd and supply by the equation P = 2 + .2Qs, where Qd and Qs are quantity
demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs
= Qd, solve the equations to determine equilibrium price. Now determine equilibrium quantity.
LO5
Chapter 03 – Demand, Supply, and Market Equilibrium
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Feedback: Consider the following equations:
demand for a commodity is P = 10 – .2Qd
7. Suppose that the demand and supply schedules for rental apartments in the city of Gotham are
as given in the table below. LO6
a. What is the market equilibrium rental price per month and the market equilibrium number of
apartments demanded and supplied?
b. If the local government can enforce a rent-control law that sets the maximum monthly rent at
$1,500, will there be a surplus or a shortage? Of how many units? And how many units will
actually be rented each month?
c. Suppose that a new government is elected that wants to keep out the poor. It declares that the
minimum rent that can be charged is $2,500 per month. If the government can enforce that price
floor, will there be a surplus or a shortage? Of how many units? And how many units will
actually be rented each month?
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d. Suppose that the government wishes to decrease the market equilibrium monthly rent by
increasing the supply of housing. Assuming that demand remains unchanged, by how many units
of housing would the government have to increase the supply of housing in order to get the
market equilibrium rental price to fall to $1,500 per month? To $1,000 per month? To $500 per
month?
Feedback: Consider the following demand and supply schedules:
Part b: If the government imposes a maximum rent of $1500 the quantity of apartments
Part c: If the government imposes a minimum rent of $2500 the quantity of apartments
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