Answer to Question #163788 in Microeconomics for Olivia

Question

1. Suppose a t-shirt shop on Market Street is selling shirts for $15, yet it can’t keep enough shirts on the shelf to satisfy all the customers who come in.

a) Draw and explain the supply and demand graph illustrating this situation

b) Describe how (if at all) you would expect price to adjust as a result.

Answer 1

Solution

As T-shirt shops on market street are selling T-shirts for $15, yet they can’t keep enough shirts on the shelves to satisfy demand, this means that the selling price of $15 is below the equilibrium price of T- shirt and hence at price $15, there is excess demand I.e. quantity demanded is greater than quantity supplied at price of $15 and hence there is shortage of T-shirt at price of $15.

a. Draw and explain the supply and demand graph illustrating this situation

Now here equilibrium occurs when the demand curve intersects the supply curve at point O and the equilibrium price of T-shirt is P* and equilibrium quantity of T-shirt is Q*. Now at price of $15, we see that the quantity demanded is Q^D and the quantity supplied is Q^S and hence as the quantity demanded becomes greater than the quantity supplied, hence there will be shortage of T-shirt = (Q^D-Q^S) and thus the shops cannot deliver T-shirt to all customers who come in.

b. Describe how (if at all) you would expect price to adjust as a result.

Now as at $15, there is excess demand or shortage of T-shirt, this shortage will create an upward pressure on the price level and as a result of which, prices starts to increase from $15 and as price starts to increase, demand for T-shirts begin to decline and supply of T-shirts begin to increase and this process will continue until Demand equals supply of T-shirt and equilibrium price P* is reached.