If the price is £125, is there a surplus or a shortage?

Question

BlackTom AI · Accepted Answer

When evaluating whether there is a surplus or a shortage at a given price, we compare the quantity supplied to the quantity demanded at that price. Each option will be assessed in turn to understand why it is or isn’t consistent with standard supply and demand reasoning.

Option a: There is a shortage. A shortage occurs when the quantity demanded exceeds the quantity supplied at that price. This would typically happen if the price were below the market-clearing level, encouraging more buyers while suppliers restrict output. Given a price of £125, this would only indicate a shortage if the market-clearing price were higher than £125 or if demand rose sharply relative to supply at £125. Without explicit demand and supply schedules, declaring a shortage solely from the price of £125 is not universally valid, so this statement would require specific information about the curves to be true.

Option b: There is a surplus. A surplus arises when the quantity supplied exceeds the quantity demanded at the given price. If £125 is above the equilibrium price, producers are willing to supply more than buyers are willing to purchase, leading to a surplus. In many standard diagrams, pricing above equilibrium tends to produce a surplus because suppliers’ incentives are stronger at higher prices, while demand contracts. Since the provided answer indicates a surplus, this option aligns with the common outcome when the price sits above the market-clearing level, assuming £125 is not at equilibrium.

Option c: Cannot be determined due to insufficient information. This would be correct if we had no information about the supply and demand schedules or the equilibrium price. In such a case, we could not deduce whether quantity supplied would exceed quantity demanded. However, given the presence of a specific price, we can usually determine the relationship if we know how the curves behave, so this option is only defensible with explicit missing data. Since the question answers with a surplus, this option is less fitting under typical interpretations unless curves are truly unknown.

Option d: There is neither surplus nor shortage because quantity demanded is equal to quantity supplied at the price level. This would describe equilibrium, where the market-clearing price equalizes quantities. If the price of £125 happened to be the equilibrium price, this statement would be correct. Without confirmation that £125 is the equilibrium price, claiming equilibrium is unfounded. Therefore, this option is only correct in the specific case where £125 exactly matches the market-clearing price, which is not given here.

In summary, each option hinges on the relationship between the given price and the market-clearing (equilibrium) price: a shortage would require demand dominance at £125, a surplus would require supply dominance, cannot be determined would require missing curve data, and equilibrium would require £125 to be the exact clearing price. The scenario presented in the provided answer aligns with the idea that at £125, the market would be pushing toward a surplus, i.e., quantity supplied would exceed quantity demanded, under the usual interpretation where £125 lies above equilibrium.

252_EC201 Microeconomics

If the price is £125, is there a surplus or a shortage?

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