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(a) When the price of wheat is $5 per bushel, 2.25 million bushels per month are demanded and 3.75 bushels are supplied. There is a wheat surplus since quantity supplied is greater than quantity demanded. At a $4 price, the quantity of wheat demanded is 2.5 million bushels per month, while the quantity of wheat supplied is 3.5 million, giving a 1 million bushel surplus. The quantity of wheat supplied and demanded is 3 million bushels when the price of wheat is $3 per bushel, and there is neither a surplus nor a shortage of wheat. When the price of wheat is $2 or $1, there is a shortage of wheat production since the quantity of wheat demanded exceeds that which is being supplied.
(b) There is downward pressure on the price of wheat when a surplus exists. In order to sell this excess production, producers must lower price to induce consumers to purchase the excess production.
(c) When a shortage exists, there is upward pressure on the price of wheat since consumers want to buy more wheat than is being supplied. Higher wheat prices induce consumers to substitute other grains for wheat, and eventually there is a balancing of quantity supplied and quantity demanded.
3.14. Market supply and demand schedules for wheat are plotted in Fig. 3-12. With reference to Fig. 3-12, explain
(a) why prices of $5 and $4 per bushel are not equilibrium prices and how the price is pushed down toward an equilibrium level,
Q (million bu per mo)
Q (million bu per mo)
(,b) why prices of $1 and $2 per bushel are not equilibrium prices and how the price is pulled up toward equilibrium, and
(c) why the equilibrium price of wheat is $3 per bushel.
(a) Figure 3-12 shows that at a price of $5 per bushel, the quantity of wheat demanded falls short of the quantity supplied (from point A to point H). This surplus of unsold wheat drives the price down. As the price falls, the quantity demanded rises (a movement down the market demand curve) and the quantity supplied falls (a movement down the market supply curve). At the price of $4 per bushel, there is still a surplus (BJ) and a downward pressure on price. The price of wheat continues to fall until the wheat surplus is completely eliminated at the price of $3 per bushel (point E).
(b) At the price of $ 1 per bushel, the quantity of wheat demanded exceeds the quantity supplied (point R to G). Because of this unsatisfied demand, consumers bid wheat prices up. As the price rises, the quantity demanded falls (a movement upward on the demand curve) and the quantity supplied rises (a movement upward on the supply curve). At the price of $2 per bushel, there is still a shortage (NF) and upward pressure on the price of wheat. As the price of wheat continues to rise, the quantity demanded continues to fall and the quantity supplied continues to rise until the wheat shortage is completely eliminated at the price of $3 per bushel (point E).
(c) The equilibrium price of wheat is $3 per bushel; only at this price is the quantity of wheat that consumers are willing to purchase per month exactly equal to the quantity that producers are willing to supply per month. Note that at any other price, the willingness of consumers is not matched by the willingness of producers, even though the quantity bought may equal the quantity sold. For example, at the price of $2 per bushel, producers supply only 2 million bushels per month; consumers buy this entire 2 million but this is not an equilibrium point since consumers are willing to purchase more at this $2 price.
3.15. Suppose the market demand for Good X is given by the equation Qd = 1000 - 20P, and market supply is given by the equation Qs = 500 + 30P.
Mathcad (a) Find quantity demanded and quantity supplied when the price of Good X is $12. Is there a surplus or shortage in the production of Good X? What should happen to the price of Good X?
(b) Find the equilibrium price for Good X by equating Qd and Qs.
(c) Prove that the price found in part (b) is an equilibrium price.
(a) Quantity demanded is found by letting P equal $12 in the demand equation Qd = 1000 - 20P. Thus, Qd = 1000 - 20(12); quantity demanded is 760. Quantity supplied is 860 when price is $12 [Qx =
500 + 30(12); Qs = 8601. There is a surplus of production since 860 units are supplied while 760 units are demanded when the price per unit is $12. There is therefore downward pressure on the $12 price for Good X.
(b) The equilibrium price for Good X is found by equating Qlt and Qs.
(c) At equilibrium, the quantity demanded must equal the quantity supplied. Substituting the $ 10 equilibrium price into the market demand and market supply equations, we find that quantity supplied and quantity demanded each equals 800 units. [Qd = 1000 - 20(10); Qd = 800. Qs = 500 + 30(10); Qs = 800.]
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