Question

The following table shows the quantities of bottled water demanded and supplied per week at different prices in a particular city: $$\begin{array}{lcc}\text{ Price }& \begin{array}{c}\text{ Quantity }\\ \text{ Demanded }\end{array}& \begin{array}{c}\text{ Quantity }\\ \text{ Supplied }\end{array}\\ \mathrm{\$}1.10& 8,000& 0\\ \mathrm{\$}1.15& 7,000& 1,000\\ \mathrm{\$}1.20& 6,000& 2,000\\ \mathrm{\$}1.25& 5,000& 3,000\\ \mathrm{\$}1.30& 4,000& 4,000\\ \mathrm{\$}1.35& 3,000& 5,000\\ \mathrm{\$}1.40& 2,000& 6,000\\ \mathrm{\$}1.45& 1,000& 7,000\\ \mathrm{\$}1.50& 0& 8,000\end{array}$$ a. Draw the supply and demand curves for this market, and identify the equilibrium price and quantity. b. Identify on your graph areas for market consumer surplus and market producer surplus when the market is in equilibrium. c. Using your graph, calculate the dollar value of market consumer surplus, market producer surplus, and the total net benefits in the market at equilibrium.

Short answer

By plotting the given data, it can be observed that the equilibrium price is $1.30 with an equilibrium quantity of 4,000 units. The consumer and producer surplus areas can be identified on the graph. Using these areas, the monetary value of the consumer and producer surplus can be calculated, and those amounts added together to find the total net benefit in the market at equilibrium.

Step-by-step solution

Plotting the supply and demand curves

From the given data, plot the quantities demanded and supplied against the price. Price will be on the vertical axis (Y-axis) and quantity will be on the horizontal axis (X-axis). Each point on the supply curve is plotted from data on the price and quantity supplied, and each point on the demand curve is plotted from data on the price and quantity demanded.

Identifying the equilibrium price and quantity

Equilibrium price and quantity occur where the supply and demand curves intersect. This intersection point represents the price and quantity where the quantity demanded equals the quantity supplied. Look carefully at the graph and observe where these two lines intersect.

Identifying areas for market consumer and producer surplus

The consumer surplus is the area between the demand curve and the line representing the equilibrium price. The producer surplus is the area between the supply curve and the line representing the equilibrium price. These areas can be visually represented as triangles on your graph.

Calculate the dollar value of market consumer surplus, market producer surplus, and the total net benefits

The dollar value of consumer and producer surplus is calculated using the formula for the area of a triangle (1/2 * base * height). The base for both calculations is the quantity (from the origin to the point of equilibrium), whereas the heights are the differences between the equilibrium price and the corresponding prices on the supply and demand curves for producer and consumer surplus respectively. Add the calculated values of consumer and producer surplus to find the total net benefits in the market at equilibrium.

Key concepts

Supply and Demand Curves

Supply and demand curves are essential tools in understanding market dynamics. These graphical representations display the relationship between the price of a good and the quantity supplied or demanded. The demand curve generally slopes downward from left to right due to the inverse relationship between price and quantity demanded: as prices fall, demand typically increases.

The supply curve, on the other hand, usually slopes upward. This is because as prices increase, producers are willing to supply more of the good. When graphing these curves, price is placed on the Y-axis, while quantity is on the X-axis.

In the provided exercise with bottled water, you would plot each price point against the corresponding quantities to visualize these curves. By observing where the two curves intersect, you can pinpoint the equilibrium price and quantity.

Consumer Surplus

Consumer surplus refers to the benefit that consumers receive when they pay less for a product than what they are willing to pay. It is the area between the demand curve and the equilibrium price line on a graph.

This area forms a triangle when the market is in equilibrium. Its value can be calculated using the formula for the area of a triangle, $\frac{1}{2}\times \text{base}\times \text{height}$. The base is the quantity at equilibrium, and the height is the difference between the highest price consumers are willing to pay (intercept of the demand curve on the Y-axis) and the equilibrium price.

In our exercise, the consumer surplus represents the total net benefits that buyers gain in the market for bottled water.

Producer Surplus

Producer surplus is the counterpart of consumer surplus and represents the benefit producers get when they sell a product at a higher price than the lowest price at which they would be willing to sell. In graphical terms, it is the area above the supply curve and below the equilibrium price line.

Similar to consumer surplus, it forms a triangle on the graph when the market is in equilibrium. The value of the producer surplus is also calculated using the triangle area formula where the base is the quantity at equilibrium, and the height is the difference between the equilibrium price and the lowest price the producers are willing to accept (intercept of the supply curve on the Y-axis).

In the context of bottled water, this surplus reveals the benefits manufacturers or sellers gain when the market price is higher than their minimum selling price.

Market Equilibrium

Market equilibrium is a state in which the quantity demanded equals the quantity supplied. It occurs at the intersection point of the supply and demand curves on a graph.

At equilibrium, the market price has settled to a point where consumers are buying, and producers are selling the exact quantity of a product. This means there is neither excess supply (surplus) nor excess demand (shortage).

In the exercise, the equilibrium is identified at the point where the curves intersect, indicating the price and quantity at which the market is balanced. Understanding equilibrium helps to predict how changes in supply or demand can affect the market.