Problem: Describe the situation at a price of $10. What will occur? Describe the situation at a price of $2. What will occur?
| Price |
Quantity Demanded |
Quantity Supplied |
| $1 |
|
500 |
|
100 |
|
| $2 |
|
400 |
|
120 |
|
| $3 |
|
350 |
|
150 |
|
| $4 |
|
320 |
|
200 |
|
| $5 |
|
300 |
|
300 |
|
| $6 |
|
275 |
|
410 |
|
| $7 |
|
260 |
|
500 |
|
| $8 |
|
230 |
|
650 |
|
| $9 |
|
200 |
|
800 |
|
| $10 |
|
150 |
|
975 |
|
Equilibrium occurs when quantity demanded equals quantity supplied.
In this schedule it occurs when the price is $5, and the quantity demanded equals quantity supplied, that is 300. When the price is $10, there will be excess supply (975) and very small demand (150) leading to a surplus in the market. The surplus can fall only when producers start charging lower prices to get rid of their inventories. This process will continue till the prices converge to $5. If the price is $2 then we have the opposite situation: very high demand (400) and very small supply (120).
Thus we will have a shortage in the market, and consumers will be willing to pay a higher price.
The price will therefore rise till it reaches the equilibrium price of $5.