Question

If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below the equilibrium level, would you predict a surplus or a shortage? Why?

Short answer

If price is above equilibrium level, then there would be surplus.

If the price is below equilibrium level, then there would be shortage.

Step-by-step solution

Step 1. Define equilibrium level.

The equilibrium level is determined by the point at which aggregate supply as well as aggregate demand are equal.

Step 2. Would you predict a surplus or a shortage if the price is above the equilibrium level and if the price is belowthe equilibrium level?

There would be a surplus if the price was above the equilibrium level. This is due to the fact that when the price is over equilibrium, prices become higher. It will be lucrative for businesses to produce more in that situation. As a result, they will increase their demand and supply, while purchasers will demand fewer items at a greater price. The quantity delivered in this scenario exceeds the quantity demanded.

There will be a shortage if the price falls below the equilibrium level. This is due to the fact that when the price falls below equilibrium, prices are lower. Buyers are keen to purchase more in this case. Firms, on the other hand, produce less because they cannot profit at reduced pricing. As a result, the quantity required exceeds the quantity available.