Question

Refer to the following expanded table from review question 8.

a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus-shortage column and use it to confirm your answers.

b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q

c. How big is the surplus or shortage at \(3.40? At \)4.90? How big a surplus or shortage results if the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price?

Thousands of bushels demanded	Price per bushel ($)	Thousands of bushels supplied
85	3.40	72
80	3.70	73
75	4.00	75
70	4.30	77
65	4.60	79
60	4.90	81

Short answer

a. The equilibrium price of wheat is $4 per bushel. At $4 price, there is neither a shortage nor surplus.

Thousands of bushels demanded	Price per bushel ($)	Thousands of bushels supplied	Shortage (D>S)	Surplus (S>D)
85	3.40	72	13 (=85-72)	-
80	3.70	73	7(=80-73)	-
75	4.00	75	0(=75-75)	0(=75-75)
70	4.30	77	-	7(=77-70)
65	4.60	79	-	14(=79-65)
60	4.90	81	-	21(=81-60)

b. The diagram and supply of wheat in the market is given below:

c. Value of shortage/surplus:

• At $3.40, the shortage is 13 thousand bushels of wheat.
• At $4.90, the surplus is 21 thousand bushels of wheat.
• At a price 60 cents higher than the equilibrium price, the surplus is 14 thousand bushels of wheat.
• At a price 30 cents lower than the equilibrium price, the shortage is 7 thousand bushels of wheat.

Step-by-step solution

Explanation of part (a)

he equilibrium price is $4 per bushel,where the demand quantity is equal to the supply, which is 75 thousand bushels.At $4 per bushel price, the market clears completely with no shortage and no surplus.

The shortage in the below table is calculated by subtracting the supply (column 3) from demand (column 1) at each rice.

The surplus is calculated by subtracting demand (column 1) from the supply (column 3) at each price.

Thousands of bushels demanded	Price per bushel ($)	Thousands of bushels supplied	Shortage (D>S)	Surplus (S>D)
85	3.40	72	13 (=85-72)	-
80	3.70	73	7(=80-73)	-
75	4.00	75	0(=75-75)	0(=75-75)
70	4.30	77	-	7(=77-70)
65	4.60	79	-	14(=79-65)
60	4.90	81	-	21(=81-60)

Graphical representation of the data

The graph is drawn by plotting the quantity variable on the x-axis and the price variable on the y-axis. Based on the values given in the expanded table, the demand curve can be drawn using quantity demanded at each price, and the supply curve can be drawn using the values of quantity supplied at each price. The intersection of these two curves gives the equilibrium price and quantity of wheat.

Explanation for part (c)

A shortage occurs when the demanded quantity exceeds the supplied quantity at a given price. Since the equilibrium price is 4, any price below this will create a shortage (demand>supply). A surplus occurs when the supplied quantity exceeds the demanded quantity at a given price. Since the equilibrium price is 4, any price above this will create a surplus (supply>demand).

Thus, consider the following points:

• When the price is $3.40, the quantity demanded is 85 thousand bushels of wheat, and the quantity supplied is 72 thousand bushels of wheat. The difference is 13 thousand bushels (85-72), which is the shortage amount.
• When the price is $4.90, the quantity demanded is 60 thousand bushels of wheat, and the quantity supplied is 81 thousand bushels of wheat. The difference is 21 thousand bushels (81-60), which is the surplus amount.
• When the price is 60 cents lower than the equilibrium price, that is, $4.60, the quantity demanded is 65 thousand bushels of wheat, and the quantity supplied is 79 thousand bushels of wheat. The difference is 14 thousand bushels (79-65), which is the surplus amount.
• When the price is 30 cents lower than the equilibrium price, that is, $3.70, the quantity demanded is 80 thousand bushels of wheat, and the quantity supplied is 73 thousand bushels of wheat. The difference is 7 thousand bushels (80-73), which is the shortage amount.