Question

Suppose the supply and demand schedules for bicycles are as they appear in the following table. $$ \begin{array}{|c|c|c|} \hline \text { Price } & \begin{array}{c} \text { Quantity Demanded } \\ \text { per Year (millions) } \end{array} & \begin{array}{c} \text { Quantity Supplied } \\ \text { per Year (millions) } \end{array} \\ \hline \$ 170 & 43 & 27 \\ \hline 210 & 39 & 31 \\ \hline 250 & 35 & 35 \\ \hline 300 & 31 & 39 \\ \hline 330 & 27 & 43 \\ \hline 370 & 23 & 47 \\ \hline \end{array} $$ a. Graph these curves and show the equilibrium price and quantity. b. Now suppose that it becomes unfashionable to ride a bicycle, so that the quantity demanded at each price falls by 8 million bikes per year. What is the new equilibrium price and quantity? Show this solution graphically. Explain why the quantity falls by less than 8 million bikes per year. c. Suppose instead that several major bicycle producers go out of business, thereby reducing the quantity supplied by 8 million bikes at every price. Find the new equilibrium price and quantity, and show it graphically. Explain again why quantity falls by less than 8 million. d. What are the equilibrium price and quantity if the shifts described in Test Yourself Questions \(3(\mathrm{~b})\) and \(3(\mathrm{c})\) happen at the same time?

Short answer

2. When demand decreases by 8 million bicycles, what is the new equilibrium price and quantity? 3. When supply decreases by 8 million bicycles, what is the new equilibrium price and quantity? 4. If both demand and supply decrease by 8 million bicycles simultaneously, what is the new equilibrium price and quantity?

Step-by-step solution

Identify the equilibrium point

To find the equilibrium price and quantity, locate the point where the quantity demanded equals the quantity supplied.

Graph the supply and demand curves

To graph the supply and demand curves, plot the given prices and corresponding quantities for both supply and demand on a coordinate plane, with price on the vertical axis and quantity on the horizontal axis.

Mark the equilibrium point on the graph

Find the point on the graph where the supply and demand curves intersect, and label this point as the equilibrium. The coordinates of this point will be the equilibrium price and quantity. In this case, the equilibrium price is $250 and the equilibrium quantity is 35 million bicycles. #b. Find the new equilibrium price and quantity, and show the solution graphically#

Adjust the quantity demanded

Subtract 8 million bicycles from the quantity demanded at each price to represent the decrease in demand.

Graph the new demand curve

Plot the new demand points on the same graph as the original supply and demand curves, and connect them to form the new demand curve.

Find the new equilibrium point

Locate the point where the new demand curve intersects the original supply curve and label this as the new equilibrium point. The new equilibrium price is $300 and the new equilibrium quantity is 31 million bicycles.

Explain why the quantity falls by less than 8 million

The quantity falls by less than 8 million bikes because the supply curve is upward sloping. As the demand decreases, the price also decreases, making suppliers less willing to produce bicycles, leading to a smaller decrease in quantity than the initial drop in demand. #c. Find the new equilibrium price and quantity, and show it graphically#

Adjust the quantity supplied

Subtract 8 million bicycles from the quantity supplied at each price to represent the decrease in supply.

Graph the new supply curve

Plot the new supply points on the same graph as the original supply and demand curves, and connect them to form the new supply curve.

Find the new equilibrium point

Locate the point where the original demand curve intersects the new supply curve and label this as the new equilibrium point. The new equilibrium price is $210 and the new equilibrium quantity is 31 million bicycles.

Explain why the quantity falls by less than 8 million

The quantity falls by less than 8 million bikes because the demand curve is downward sloping. As the supply decreases, the price increases, making customers less willing to buy bicycles, leading to a smaller decrease in quantity than the initial drop in supply. #d. Find the equilibrium price and quantity if both shifts happen at the same time#

Adjust both the quantity demanded and quantity supplied

Subtract 8 million bicycles from both the quantity demanded and quantity supplied at each price to represent the simultaneous changes in demand and supply.

Graph the new supply and demand curves

Plot the new supply and demand points on the same graph as the original supply and demand curves, and connect them to form the new supply and demand curves.

Find the new equilibrium point

Locate the point where the new demand and supply curves intersect and label this as the new equilibrium point. The new equilibrium price is $270 and the new equilibrium quantity is 27 million bicycles.

Key concepts

Supply and Demand Schedules

Supply and demand schedules provide a framework for understanding how the quantity supplied and demanded of a product varies with its price. The schedules list prices alongside the corresponding quantities of a good that buyers are willing to purchase (demand) and sellers are willing to sell (supply) at those prices.

For example, in the exercise involving bicycles, the supply schedule shows that at a lower price of \(170, suppliers are willing to provide 27 million bicycles, while at a higher price of \)370, they are willing to supply 47 million. Conversely, the demand schedule indicates that consumers are willing to purchase 43 million bicycles at the lower price of \(170, but only 23 million at the higher price of \)370.

Understanding these schedules helps us to visualize market behavior and predict how changes in price affect the quantity supplied and demanded. Hence, they are the first crucial step in analyzing market equilibrium.

Graphing Supply and Demand Curves

Graphing the supply and demand curves is an essential step in visualizing the relationship between the price of a good and the quantity supplied and demanded. To create these graphs, we plot the data from the supply and demand schedules on a coordinate plane, with the price on the vertical axis (y-axis) and the quantity on the horizontal axis (x-axis).

The demand curve typically slopes downwards, reflecting the inverse relationship between price and quantity demanded—when the price goes up, the quantity demanded goes down, and vice versa. The supply curve, on the other hand, slopes upwards, indicating that a higher price motivates producers to supply more of the product. The equilibrium point, where the two curves intersect, represents the market equilibrium where the quantity supplied equals the quantity demanded.

In the given exercise, after plotting the supply and demand schedule data for bicycles, the demand curve would slope downward, and the supply curve would slope upward. The intersection of these two curves provides us with the equilibrium price and quantity, crucial for understanding market dynamics.

Market Equilibrium Analysis

Market equilibrium analysis involves determining the point at which the quantity of a good demanded by consumers is equal to the quantity supplied by producers, resulting in a stable market price. At this point, there is no tendency for the price to change because the market forces of supply and demand are in balance.

In the exercise, the initial market equilibrium is identified at a price of $250, with a quantity of 35 million bicycles. When there's a shift in demand or supply, equilibrium is affected. For instance, if it becomes unfashionable to ride bicycles, the demand curve shifts to the left, leading to a new equilibrium point with a higher price and lower quantity than before. Similarly, if several bicycle producers go out of business, the supply curve shifts to the left, causing a higher equilibrium price and a lower quantity.

Comprehending market equilibrium analysis allows us to predict how changes in the market, such as a change in consumer preferences or production capacity, can affect pricing and availability of goods. When both demand and supply decrease simultaneously, the intersection of the new curves determines the new equilibrium price and quantity, illustrating the dual impact on the market.