Answer to Question #230102 in Macroeconomics for k'von

Question

Assume gadgets are sold in a competitive market, the equilibrium price is $6, and the equilibrium quantity is 500 units.

(a) Using the numerical values above, draw a correctly labeled graph of the market for gadgets and show each of the following.

(i) The equilibrium price

(ii) The equilibrium quantity

(b) At a price of $8 per unit, will there be a surplus or a shortage in the market? Explain.

(c) Assume gadgets now become more popular. On your graph in part (a), show the effect of the increase in gadgets' popularity on the equilibrium price and quantity of gadgets.

(d) Assume instead there is an increase in the price of tin, a major input in producing gadgets. What will be the effect of an increase in the price of tin on the market for gadgets?

(e) If both changes in part (c) and part (d) occurred simultaneously, will the equilibrium quantity of gadgets increase, decrease, remain unchanged, or be indeterminate? Explain.

Answer 1

Solution:

a.). The graph of the gadgets market is as below showing the following:

i. The equilibrium price

ii. The equilibrium quantity

 

b.). At a price of $8 per unit, which is above the equilibrium price, there will be a surplus in the market. This is because the quantity supplied will be greater than the quantity demanded, thus creating a surplus.

 

c.). When the gadgets become more popular, the quantity demanded will increase and the demand curve will shift to the right. Thus, the equilibrium price and quantity of gadgets will increase to a new equilibrium price and quantity due to the demand increase as a result of the popularity.

This is depicted by the below graph:

 

d.). An increase in the price of tin, a major input in producing gadgets will result in an increase in production costs for gadgets, which will ultimately cause the gadgets price to increase in the market. Due to the increase in price, the demand for gadgets will fall since most consumers will not be able to afford them or go for other cheaper substitute products. The demand curve for gadgets will shift to the left, thus the equilibrium price will increase while the equilibrium quantity will reduce.

 

e.). If both changes in part c and d occur simultaneously, the equilibrium quantity of gadgets will be indeterminate. This is because supply and demand will move in opposite directions, thus the impact on equilibrium price and quantity cannot be determined for certain without knowing which changed by a greater amount.