At a price of $40, there is a a. Surplus of 10 units. b. Surplus of 5 units. c. Shortage of 10 units. d. Shortage of 5 units.
The correct answer and explanation is:
To determine whether there is a surplus or shortage at a price of $40, it is necessary to know the quantity demanded and the quantity supplied at that price. A surplus occurs when the quantity supplied is greater than the quantity demanded. A shortage occurs when the quantity demanded is greater than the quantity supplied.
Step 1: Find quantity demanded and quantity supplied at $40.
If given a demand and supply schedule or equations, substitute the price $40 into both to get the respective quantities.
Step 2: Compare quantity supplied and quantity demanded.
- If quantity supplied > quantity demanded → surplus
- If quantity demanded > quantity supplied → shortage
Step 3: Calculate the size of surplus or shortage.
The difference between quantity supplied and quantity demanded gives the amount of surplus or shortage.
Example:
Suppose at a price of $40, the quantity demanded is 15 units and the quantity supplied is 25 units. Since suppliers want to sell 25 units but buyers only want 15 units, there is a surplus of:
25 units supplied – 15 units demanded = 10 units surplus.
If instead, quantity demanded was 25 and quantity supplied was 15, the shortage would be:
25 units demanded – 15 units supplied = 10 units shortage.
Conclusion:
Without exact quantities, the general principle is:
- A surplus of 10 units means supply exceeds demand by 10 at $40 (Answer: a).
- A surplus of 5 units means supply exceeds demand by 5.
- A shortage of 10 units means demand exceeds supply by 10.
- A shortage of 5 units means demand exceeds supply by 5.
If the problem states or implies at $40 there is a surplus of 10 units, then option a. Surplus of 10 units is correct.
Explanation:
At a given price, the interaction between quantity demanded and supplied determines market equilibrium. When the price is set above equilibrium, suppliers want to sell more than buyers want to buy, causing surplus. Sellers may lower prices to clear excess inventory. When the price is below equilibrium, buyers want to buy more than sellers supply, causing shortage. Buyers compete, pushing price up.
Thus, knowing the quantities at $40 is key, but the concept of surplus and shortage is based on whether supply or demand is greater at that price.