Question

The following table gives hypothetical data for the quantity of two-bedroom rental apartments demanded and supplied in Peoria, Illinois: $$\begin{array}{lcc} & \text { Quantity } & \text { Quantity } \\ \text { Monthly } & \text { Demanded } & \text { Supplied } \\ \text { Rent } & \text { (thousands) } & \text { (thousands) } \\ \hline \$ 800 & 30 & 10 \\ \$ 1,000 & 25 & 14 \\ \$ 1,200 & 22 & 17 \\ \$ 1,400 & 19 & 19 \\ \$ 1,600 & 17 & 21 \\ \$ 1,800 & 15 & 22 \end{array}$$ a. Graph the demand and supply curves. b. Find the equilibrium price and quantity. c. Explain bricfly why a rent of \(\$ 1,000\) cannot be the equilibrium in this market. d. Suppose a tornado destroys a significant number of apartment buildings in Peoria but doesn't affect people's desire to live there. Illustrate on your graph the effects on equilibrium price and quantity.

Short answer

The equilibrium price is $1400 with an equilibrium quantity of 19 thousand apartments. A rent of $1000 is not an equilibrium since the quantity demanded at that price level surpasses the quantity supplied. After a tornado reduces the number of apartments, the equilibrium price will increase and the quantity will decrease.

Step-by-step solution

Draw the Demand and Supply Curves

Start from the table, plot the quantity demanded and quantity supplied for each price level. The quantity demanded will be your demand curve and the quantity supplied will be your supply curve. Make sure to label each curve and each axis.

Find the Equilibrium

The equilibrium occurs where the demand curve meets the supply curve. That is, where the quantity demanded equals the quantity supplied. From the graph or the table, one can see that the equilibrium is at a rent of $1400, where the quantity demanded and quantity supplied are both 19 thousand.

Analyze the $1000 Pricing Scenario

At a rent of $1000, demand is 25 thousand while supply is 14 thousand. It means that the quantity of apartments that people would want to rent at this price exceeds the quantity that owners are willing to supply. This imbalance means that a rent of $1000 cannot be the equilibrium in this market.

Analyze the Change in Housing Availability

If a tornado destroys a significant number of apartment buildings, the supply curve will shift to the left, symbolizing a decrease in the quantity of apartments available at each price level. This will result in a new equilibrium with a higher price (since under-supply will naturally drive prices up) and a lower quantity (since there are now fewer apartments). The exact values will depend on the magnitude of the shift. This should be illustrated on your graph with corresponding markings and explanations.

Key concepts

Demand and Supply Curves

Understanding demand and supply curves is crucial for grasping basic economic principles. These curves visually represent consumer behavior and producer capacity at varying price levels. The demand curve slopes downward to the right, indicating that as the price decreases, consumers are willing and able to purchase more of a good or service. Conversely, the supply curve usually slopes upward, suggesting that as the price increases, producers are willing and able to supply more.

• The quantity demanded is the amount of a product consumers are ready to buy at a specific price.
• The quantity supplied is the amount of a product producers are ready to sell at a specific price.

To graph these curves based on a table of data, like the one provided for rental apartments in Peoria, start by plotting points on a graph where the horizontal axis (x-axis) represents quantity and the vertical axis (y-axis) represents price. Connect the points for demand and do the same for supply to see the interaction between these two forces in the marketplace.

Market Equilibrium

When it comes to the heartbeat of a market, we're talking about market equilibrium—the sweet spot where supply perfectly meets demand. At the equilibrium price, there is no surplus or shortage. Sellers sell exactly as much as buyers want to buy, resulting in a balanced market. How do we find this point of balance? Simply look for the price at which the quantity demanded equals the quantity supplied—that’s where the two curves intersect.

Finding Equilibrium in a Table

To determine the equilibrium from a table, search for the price where the quantity demanded and supplied are the same. In the Peoria apartments case, this happens at a monthly rent of $1,400, which corresponds to both the demanded and supplied quantity of 19 thousand apartments.

• If the price is above equilibrium, a surplus occurs, leading to unsold goods.
• If the price is below equilibrium, a shortage arises, and consumers may be left wanting.

Understanding the equilibrium price is essential because it's the most efficient outcome, with no wasted resources or unsatisfied demand.

Effects of Supply Changes on Equilibrium

Changes in supply can have a significant impact on the market's equilibrium. A leftward shift in the supply curve signifies a decrease in supply, which could be due to various reasons such as natural disasters, increased production costs, or regulations. When this shift occurs, the equilibrium is affected—prices tend to rise since the reduced supply pushes up competition for the available units, and the quantity at equilibrium falls because there are fewer goods being produced or supplied.

Real-world Application: The Tornado Scenario

In the context of our Peoria apartment market, imagine a tornado devastates the area, reducing the overall housing stock. With fewer apartments available, the supply curve shifts left. If we return to our table and reimagine it with this new reality in mind, the quantity supplied at each price level is now lower. The new intersection point of the supply and demand curves defines a higher equilibrium rent and a lower number of apartments rented.

• A leftward shift in supply leads to higher prices and lower quantities at equilibrium.
• The extent of the shift determines the new equilibrium price and quantity.

Understanding these dynamics helps students predict and understand actual market reactions to changes in supply, which is critical for both consumers and producers.