Question

What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when there is a surplus?

Short answer

In short, at equilibrium, the quantity demanded is equal to the quantity supplied, reflecting a stable market situation with no shortage or surplus. During a shortage, the quantity demanded exceeds the quantity supplied, causing upward pressure on prices until a new equilibrium is reached. Conversely, during a surplus, the quantity demanded is less than the quantity supplied, resulting in a decrease in prices until a new equilibrium is established where the quantity demanded equals the quantity supplied.

Step-by-step solution

Understanding Quantity Demanded, Quantity Supplied, and Equilibrium

Quantity demanded refers to the amount of a good or service that consumers are willing and able to purchase at a given price level. Quantity supplied refers to the amount of a good or service that firms are willing and able to produce at a given price level. Equilibrium occurs in a market when the quantity demanded equals the quantity supplied at a particular price level. In other words, equilibrium is the point at which the demand and supply curves intersect, resulting in a single equilibrium price and quantity.

Relationship between Quantity Demanded and Quantity Supplied at Equilibrium

At equilibrium, the quantity demanded is equal to the quantity supplied. This means that the amount consumers want to buy matches the amount producers want to sell. There is no shortage or surplus of the good or service in the market, and the equilibrium price prevails.

Understanding Shortages and Surpluses

A shortage occurs when the quantity demanded is greater than the quantity supplied at a given price level. This means that consumers want to buy more of a good than is available in the market. A surplus occurs when the quantity demanded is less than the quantity supplied at a given price level. In this situation, more of a good is available in the market than consumers want to buy.

Relationship between Quantity Demanded and Quantity Supplied during a Shortage

During a shortage, the quantity demanded exceeds the quantity supplied at a given price level. This relationship indicates that consumers' desire for a good or service is not satisfied, leading to upward pressure on prices. As prices increase, quantity demanded will decrease, while quantity supplied will increase. This process will continue until the market reaches a new equilibrium where the quantity demanded once again equals the quantity supplied.

Relationship between Quantity Demanded and Quantity Supplied during a Surplus

During a surplus, the quantity demanded is less than the quantity supplied at a given price level. This relationship indicates that there is an excess supply of a good or service in the market. As a result, prices will likely decrease to encourage consumers to purchase the excess supply. As prices decrease, quantity demanded will increase, and quantity supplied will decrease. This process will continue until the market reaches a new equilibrium where the quantity demanded once again equals the quantity supplied.