Question

At the current price level, producers supply \(\$ 375\) billion of final goods and services while consumers purchase \(\$355\) billion of final goods and services. The price level is: a. Above equilibrium. b. At equilibrium. c. Below equilibrium. d. More information is needed.

Short answer

The price level is above equilibrium (a).

Step-by-step solution

Understand Equilibrium

In economics, equilibrium is where the quantity supplied equals the quantity demanded. We need to identify if the current situation meets this condition by comparing supply and demand.

Compare Supply and Demand

The producers supply \(\\(375\) billion, and consumers purchase \(\\)355\) billion. Since the supply is greater than the demand, \(\\(375\,\text{billion} > \\)355\,\text{billion}\), this indicates there is a surplus.

Infer the Price Level Condition

A surplus means that at the current price level, there are more goods supplied than demanded. In such a case, the price level is above the equilibrium as producers are willing to supply more than consumers are demanding.

Key concepts

Supply and Demand

One of the fundamental concepts in economics is the relationship between supply and demand. Supply refers to the total amount of a product or service that producers are willing and able to sell at a given price. Meanwhile, demand represents the total amount that consumers are willing and able to purchase. When we talk about how these two forces interact, it helps explain how prices are set in a market. If the demand is greater than the supply, prices might rise because consumers compete to purchase the limited goods. Conversely, if supply exceeds demand, prices might fall as producers compete to sell their goods.

Price Level

The price level in a market is determined by the interaction of supply and demand. It reflects the average price of goods and services in an economy. When the price level is too high, it means producers are supplying more goods than consumers are willing to buy, leading to a surplus. If the price level is too low, consumers are willing to buy more than producers are willing to supply, leading to shortages. Adjustments in the price level can help restore balance in the market by influencing both demand and supply to move toward equilibrium.

Economic Surplus

Economic surplus occurs when the quantity supplied exceeds the quantity demanded at the current price level. This can happen when producers have set prices higher than what consumers are willing to pay. The gap between supply and demand results in unsold goods or unused services, prompting sellers to consider reducing their prices. A surplus indicates inefficiency in the market, as resources are not being fully utilized. It often signals that the market is out of balance and that adjustments in pricing are necessary to reach equilibrium.

Equilibrium Price

The equilibrium price is the price at which the quantity of goods supplied equals the quantity of goods demanded. This is the ideal state for a market because it means resources are perfectly allocated; producers sell all their goods, and consumers buy all they want without any shortage or surplus. Finding this point helps maintain stability in the market. If current prices differ from the equilibrium, forces of supply and demand naturally push prices to adjust, achieving balance over time. Understanding this concept is key to analyzing how markets function and respond to changes in conditions.