Answer to Question #132669 in Microeconomics for imama

Question

Price per Ice-cream (Rs.) Demand for Ice cream (Qd) Supply for Ice cream (Qs)
140 500 1500
120 750 1200
100 1000 1000
80 1250 750
60 1500 600
40 1750 300

(i) Draw the market equilibrium for Ice cream. (2 Marks)
(ii) Find out equilibrium price and quantity. (0.5 Marks)
(iii) Is there surplus or shortage in the market at price Rs.40? At price Rs.120? (0.5 Marks)

Answer 1

(i) The graph bellow illustrates the market equilibrium for the data above.

The equilibrium point is marked by e. The equilibrium point is the position where demand and supply interact; Qd = Qs at the equilibrium point.

(ii) At the equilibrium point, e, $Qd = Qs$ therefore,

$Equilibrium \space price = Rs. \space 100 \space , and \\ Equilibrium \space quantity = 1000 \space units$

(iii)

When price is Rs. 40 there is a shortage of 1450 units, and when price is Rs. 120 there is a surplus of 450 units.

When the price is $Rs. \space 40$ Qd (1750 units) exceeds Qs (300 units). There is therefore a shortage of 1750 units - 300 units = 1450 units.

The shortage is indicated by the shaded region, B, on the graph in (i) above.

When the price is $Rs. \space 120$ Qs (1200 units) exceeds Qd (750 units) resulting in a market surplus of 1200 units - 750 units = 450 units. The surplus is indicated by the shaded region, A, on the graph.