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. a. A shortage. b. A surplus. c. An equilibrium quantity. d. None

Short answer

b. A surplus.

Step-by-step solution

Understand Equilibrium Price

The equilibrium price is the price at which the quantity of memory chips demanded by consumers is equal to the quantity supplied by producers. In this market, the equilibrium price is \(\$50\) per chip.

Identify Current Market Condition

Currently, the market price is \(\\(55\) per chip, which is higher than the equilibrium price of \(\\)50\). This indicates that the price has moved away from what is needed to balance supply and demand.

Assess the Effect of Higher Price

When the price is above the equilibrium level, the quantity supplied tends to exceed the quantity demanded. Producers are willing to sell more at \(\$55\) because of higher potential profits, but consumers are less willing to purchase because of the higher price.

Conclusion on Market Condition

Given that the current price is above equilibrium, there is an excess supply situation known as a surplus. Thus, at \(\$55\) per chip, there will be a surplus of memory chips.

Key concepts

Supply and Demand

Supply and demand are fundamental concepts in economics that determine the prices of goods and services. The law of demand states that, all else being equal, as the price of a product decreases, the quantity demanded increases. Conversely, as the price increases, the quantity demanded decreases. This relationship is represented by a downward-sloping demand curve. Conversely, the law of supply suggests that as a product's price increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases. This results in an upward-sloping supply curve.
When the supply and demand curves intersect, the market reaches an equilibrium point. At this intersection, the quantity that consumers are willing to buy equals the quantity that producers are willing to sell, which stabilizes the price at the equilibrium level. Understanding these principles helps us predict how shifts in supply or demand can affect market equilibrium.

Price Mechanism

The price mechanism is a system in which the forces of supply and demand interact to determine the price of goods and services. It acts as an invisible hand, directing resources to their most productive uses. When demand for a good increases, the price tends to rise; when the supply rises, prices tend to fall, ensuring that the quantity demanded equals the quantity supplied.
Prices act as signals to both consumers and producers. For consumers, a higher price signals scarcity and may lead them to demand less. For producers, a higher price provides an incentive to increase production. In this way, the price mechanism efficiently allocates scarce resources in a market economy without the need for central planning.

• Prices fluctuate based on demand and supply changes.
• High demand or low supply pushes prices up.
• Low demand or high supply pushes prices down.

Understanding this mechanism is crucial for predicting how changes in one part of the market can ripple through and affect others.

Surplus and Shortage

Surplus and shortage occur when the market price deviates from the equilibrium price. A surplus happens when the current price is higher than the equilibrium price, causing the quantity supplied to exceed the quantity demanded. Producers have more goods than consumers are willing to buy at that price, leading to excess supply.
On the other hand, a shortage occurs when the current price is lower than the equilibrium price, causing the quantity demanded to exceed the quantity supplied. In this situation, consumers want more of the good than is available, leading to insufficient supply.

• Surplus: More supply than demand at the given price.
• Shortage: More demand than supply at the given price.

In each case, the market tends to correct itself over time. A surplus will often lead to price reductions to clear excess inventory, while a shortage may lead to price increases to balance supply and demand. Understanding these concepts helps in analyzing market dynamics effectively.