Step-by-step explanation:
1) The equilibrium price is the price where the quantity demanded (Qd) equals the quantity supplied (Qs). If you look at your table, at the price of $3, the quantity demanded of 60 is equal to quantity supplied (Qs) of 60.
- Equilibrium (E): Qd = Qs
- Equilibrium quantity = 60
- Equilibrium price (E) = $3
2) At the market price of $2, the quantity demanded (Qd) of 80 is greater than the quantity supplied (Qs) of 35. This represents a shortage, where Qd > Qs. Shortages occur only at prices below the equilibrium price. This implies that there isn't sufficient supply of yo-yos to keep up with the demand.
- Shortage = Qd - Qs = 80 - 35 = 45.
3) If the price is $2, the price will tend to increase due to an existing shortage. Some buyers will bid up the price of a good to get sellers to sell to them instead of to other buyers. Some sellers will realize that they can raise the price of the goods they have for sale. Higher prices will call forth added output. Price and output rise until equilibrium is achieved.
4. If the price in the market is $5, then there is a surplus of yo-yos because the quantity demanded (Qd) of 20 is lesser than the quantity supplied (Qs) 110 (or, you could also express it as the quantity supplied of 110 is greater than the quantity demanded of 20). Surpluses occur only at prices above the equilibrium price.
- Surplus = Qs - Qd = 110 - 20 = 90.
5. If the price is $5, it will eventually decrease over time. Due to surplus, sellers’ inventories rise above the level the sellers hold in preparation for changes in demand. Sellers will want to reduce their inventories. As a result, price and output fall until equilibrium is achieved.
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