Question

Suppose that in the market of computer memory chips, the equilibrium price is \(50 per chip. If the current price is \)55 per chip, then there will be a(an) ______________ of memory chips.

a. shortage

b. surplus

c. equilibrium quantity

d. none of the above

Short answer

Option (b): surplus

Step-by-step solution

Meaning of excess demand and excess supply

Excess demand is created when the price of a good is lower than the equilibrium level of the price. At this lower price, the consumer’s demand for the good exceeds the supply. Hence, there is a shortage of goods in the market.

Excess supply is created when the price of a good is higher than the equilibrium level or market-determined level of price. At this higher price, suppliers have high incentives to increase supply. Hence, there is a surplus or excess supply in the market.

Explanation for surplus

In the below diagram, the equilibrium is achieved at a $50 price, where the demand for memory chips is equal to the supply of memory chips. If the price of the memory chips is $55, which is above the market-determined price of $50, the market does not clear completely. The extra $5 encourages sellers to supply more, but a higher price discourages consumption, as shown in the diagram.

Thus, at $55 price, the sellers are supplying more than the demanded quantity of memory chips. Hence, there is an excess supply or surplus of memory chips (represented by the shaded region).