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Chapter 3: Q5. (page 65)

Suppose that in the market of computer memory chips, the equilibrium price is \(50 per chip. If the current price is \)55 per chip, then there will be a(an) ______________ of memory chips.

a. shortage

b. surplus

c. equilibrium quantity

d. none of the above

Short Answer

Expert verified

Option (b): surplus

Step by step solution

01

Meaning of excess demand and excess supply

Excess demand is created when the price of a good is lower than the equilibrium level of the price. At this lower price, the consumer鈥檚 demand for the good exceeds the supply. Hence, there is a shortage of goods in the market.

Excess supply is created when the price of a good is higher than the equilibrium level or market-determined level of price. At this higher price, suppliers have high incentives to increase supply. Hence, there is a surplus or excess supply in the market.

02

Explanation for surplus

In the below diagram, the equilibrium is achieved at a $50 price, where the demand for memory chips is equal to the supply of memory chips. If the price of the memory chips is $55, which is above the market-determined price of $50, the market does not clear completely. The extra $5 encourages sellers to supply more, but a higher price discourages consumption, as shown in the diagram.

Thus, at $55 price, the sellers are supplying more than the demanded quantity of memory chips. Hence, there is an excess supply or surplus of memory chips (represented by the shaded region).

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