Question

Suppose that in the market for computer memory chips, the equilibrium price is \(\$ 50\) per chip. If the current price is \(\$ 55\) per chip, then there will be ________ of memory chips. LO3.4 a. A shortage. b. A surplus. c. An equilibrium quantity. d None of the above.

Short answer

b. A surplus.

Step-by-step solution

Understanding Equilibrium Price

The equilibrium price is the price at which the quantity demanded by consumers equals the quantity supplied by producers. In this case, the equilibrium price for computer memory chips is given as $50 per chip.

Analyzing Current Price Situation

The current price is $55 per chip, which is higher than the equilibrium price of $50. When the market price is above the equilibrium price, the quantity supplied by producers exceeds the quantity demanded by consumers, resulting in excess supply.

Determine Market Condition

Since the quantity supplied is greater than the quantity demanded at the price of $55 per chip, there will be a surplus of memory chips in the market. A surplus occurs when there are more goods available than consumers want to buy at the current price.

Key concepts

Equilibrium Price

The equilibrium price is a fascinating concept in economics. It represents the perfect balance where the quantity of a product that consumers want to buy equals the quantity that producers want to sell. This harmony is achieved when supply meets demand without any excess or shortage.

In the realm of computer memory chips, this delicate equilibrium is established at \( \$50 \) per chip. At this price, chip manufacturers can sell exactly as many chips as consumers are willing to purchase.

It's crucial to understand that this equilibrium is dynamic and can change with shifts in market conditions. Changes in consumer preferences, production costs, or technological advancements can tilt this balance, affecting the equilibrium price.

Surplus

A surplus occurs when the quantity of a good supplied surpasses the quantity demanded at a given price. This scenario typically arises when the price in the market is higher than the equilibrium price.

Imagine this: the current price of computer memory chips jumps to \( \\(55 \) per chip, surpassing the equilibrium of \( \\)50 \). Consumers, faced with higher prices, tend to buy fewer chips, while producers are eager to supply more given the profitable price.

As a result, the market experiences a surplus—a condition where there are more chips available than consumers wish to buy at the current price of \( \$55 \). If this surplus persists, producers might lower their prices to stimulate demand, steering the market back towards equilibrium.

Quantity Demanded vs. Quantity Supplied

Understanding the relationship between quantity demanded and quantity supplied is pivotal in deciphering market dynamics. Quantity demanded is the number of goods consumers are ready and willing to purchase at a specific price.

Conversely, quantity supplied refers to the number of goods that producers are ready and willing to sell at that price.

When market prices rise above the equilibrium, as in the case of computer memory chips priced at \( \$55 \), the quantity supplied often exceeds the quantity demanded.

• Consumers react to higher prices by buying less, leading to a lower quantity demanded.
• Producers, enticed by higher profits, push more goods into the market, increasing the quantity supplied.

This mismatch between quantity demanded and supplied generates surplus. Recognizing how these quantities adjust with price changes helps predict whether a surplus or shortage might occur, and how the market can return to equilibrium.