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Question

The market for pizza has the following demand and supply schedule:


Price      Quantity Demanded          Quantity Supplied
$4          135 pizzas                          26 pizzas
5            104                                   53
6            81                                     81
7            68                                       98
8           53                                       110
9           39                                      121

a. Graph the demand and supply curves. What is the equilibrium price and quantity in this market?
b. If the actual price in this market were ABOVE equilibrium price, what would drive the price toward the equilibrium?
c. If the actual price in this market where BELOW the equilibrium price, what would drive the price toward the equilibrium?

Solution

a) At equilibrium, Quantity demanded = Quantity supplied

At a price of $ 6, Quantity demanded = Quantity supplied (i.e., 81)

Conclusion:- The equilibrium price is $6.00 and equilibrium quantity is 81.

b) If the actual price in this market is above equilibrium, the quantity supplied of pizza is greater than the quantity demanded of pizza. The supplier must cut down its cost in order to increase the sales of pizza. This moves the price towards its equilibrium price.

c) If the actual price in the market is below equilibrium, the quantity demanded for pizza is greater than the quanity supplied of pizza. This particular situation allows the supplier to take advantage of the shortage by raising its prices.