Page 111 - Krugmans Economics for AP Text Book_Neat

figure 6.8

Price Below Its Equilibrium
Level Creates a Shortage Price of
coffee beans
The market price of $0.75 is below the equi- (per pound) Section 2 Supply and Demand
librium price of $1. This creates a shortage: Supply
consumers want to buy 11.5 billion pounds, $2.00
but only 9.1 billion pounds are for sale, so
there is a shortage of 2.4 billion pounds. This 1.75
shortage will push the price up until it reaches 1.50
the equilibrium price of $1.
1.25

1.00 E
0.75

0.50 Shortage Demand

0 7 9.1 10 11.5 13 15 17
Quantity of coffee beans
(billions of pounds)
Quantity Quantity
supplied demanded

Using Equilibrium to Describe Markets

We have now seen that a market tends to have a single price, the equilibrium price. If
the market price is above the equilibrium level, the ensuing surplus leads buyers and
sellers to take actions that lower the price. And if the market price is below the equilib-
rium level, the ensuing shortage leads buyers and sellers to take actions that raise the
price. So the market price always moves toward the equilibrium price, the price at which
there is neither surplus nor shortage.

Module 6 AP Review

Solutions appear at the back of the book.
Check Your Understanding
1. Explain whether each of the following events represents (i) a Caribbean cruise lines have offered more cabins, at lower
change in supply or (ii) a movement along the supply curve. prices, than before.
a. During a real estate boom that causes house prices to rise,
2. In the following three situations, the market is initially in
more homeowners put their houses up for sale.
equilibrium. After each event described below, does a surplus or
b. Many strawberry farmers open temporary roadside stands
shortage exist at the original equilibrium price? What will
during harvest season, even though prices are usually low at
happen to the equilibrium price as a result?
that time.
a. In 2010 there was a bumper crop of wine grapes.
c. Immediately after the school year begins, fewer young people
b. After a hurricane, Florida hoteliers often find that many
are available to work. Fast-food chains must raise wages,
people cancel their upcoming vacations, leaving them with
which represent the price of labor, to attract workers.
empty hotel rooms.
d. Many construction workers temporarily move to areas that
c. After a heavy snowfall, many people want to buy
have suffered hurricane damage, lured by higher wages.
second-hand snowblowers at the local tool shop.
e. Since new technologies have made it possible to build larger
cruise ships (which are cheaper to run per passenger),
module 6 Supply and Demand: Supply and Equilibrium 69