Chapter 3, Problem 1SCQ

Review Figure 3.4. Suppose the price of gasoline is $\$\text{1}.\text{6}0$ per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $\$\text{1}.\text{4}0$ per gallon? What about the quantity supplied? Is there a shortage or a surplus in the market? If so, how much?

Figure 3.4 Demand and Supply of Gasoline

To determine

If the price of gasoline is $1.60 per gallon and the equilibrium price is $1.40 per gallon. Comment whether the quantity demanded and supplied is higher or lower at $1.60 per gallon. Is there a shortage or surplus?

Explanation of Solution

As per the diagram, the equilibrium price is $1.40 per gallon in the market. Any price above the equilibrium price level in the market creates surplus of the product in the market and any price below the equilibrium price creates a shortage of the product in the market.

In the above figure, at price level $1.60 per gallon, the quantity demand is 550 millions of gallons and quantity supply is 680 million gallons, represented by point A and B in the diagram. Clearly, we can see that quantity supply is more than quantity demand and there is a surplus of the product.

If the price is below the equilibrium price, then there will be shortage of the product.

Economics Concept Introduction

Equilibrium Price: It is that level of price where demand of a product is equal to the supply of a product.