Exercise Set 6
EXCESS SUPPLY AND EXCESS DEMAND

I. Objectives

• To compute quantity demanded and supplied at a given price
• To obtain excess demand or excess supply in a market
• To compute the equilibrium price

II. Data

Demand:   Q = 5000 - 25P,
Supply:   Q = 5P - 100,

• For any value of price (P), obtain the corresponding quantity demanded and quantity supplied.
• Next, determine the excess demand or excess supply in the market.
• Select a value for Price and click on Gimme Excess Supply! to verify your calculations.

Price =

Quantity demanded

Quantity supplied

Market condition

Excess supply*

* A positive value represents a surplus; a negative value excess demand (or shortage).

III. Questions

1. Using the equations above, sketch the demand and supply curves. Indicate the intercepts and slope of each.
2. If the price falls to, or below, $ _____, firms will not supply any quantity to the market.
3. If the market price is at, or above, $ _____, consumers will not buy quantity of the good.
4. Suppose the current market price is $150. At this price the market experiences a [ surplus / shortage ] which will be eliminated if the market price [ rises / falls ]. Explain.
5. The equilibrium price in the market is $ _____; the equilibrium quantity is ______. Indicate the values on the graph.
6. If the govt imposes a price floor of $180, it will result in a [ shortage / surplus ] of ______ units of the good. Indicate the effect of the price floor on the graph.

IV. Additional questions

1. The market for widgets is described by the following:
   Demand: P = 24 - 2Q,
   Supply: P = 3 + Q,
   
   where P represents the price of a widget and Q the quantity of widgets.
   
   1. Sketch the demand and supply curves for widgets.
   2. Obtain the equilibrium values of price and quantity, and indicate them on the graph.
   3. The govt. imposes a price floor of $20, i.e. the market price of a widget cannot be less than $20. On a graph below, indicate the quantity of widgets that will be bought and sold in the market. 
   4. Compute the value of excess supply (or excess demand) of widgets at a price floor of $10.
   5. If the govt. were to remove the price floor, the price of books will [ rise / fall ] immediately. Explain.
      
2. The govt. raises the hourly minimum wage to $10.00. Noting the current conditions in the labor market, explain how the increase in the minimum wage will affect the level of employment. (Sketch also required.)