Market Equilibrium and Disequilibrium
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AP Macroeconomics › Market Equilibrium and Disequilibrium
Assume the market for lumber is in equilibrium. A widespread pest infestation destroys a significant portion of the forests used for lumber production. What is the most likely effect on the equilibrium price and quantity of lumber?
Price will increase, and quantity will increase.
Price will decrease, and quantity will decrease.
Price will increase, and quantity will decrease.
Price will decrease, and quantity will increase.
Explanation
The destruction of forests represents a decrease in the availability of a key input for lumber production, which causes the supply curve for lumber to shift to the left. This results in a higher equilibrium price and a lower equilibrium quantity.
In the market for coffee, a popular new diet promotes drinking three cups per day. At the same time, ideal weather conditions lead to a record coffee bean harvest. Which of the following is the certain outcome in the coffee market?
The equilibrium price will decrease.
The equilibrium quantity will decrease.
The equilibrium quantity will increase.
The equilibrium price will increase.
Explanation
The new diet increases the demand for coffee (shifts demand right). The record harvest increases the supply of coffee (shifts supply right). Since both shifts lead to a larger quantity being exchanged, the equilibrium quantity will definitely increase. The effect on price is indeterminate because the demand increase pushes the price up while the supply increase pushes it down.
The demand for avocados increases due to perceived health benefits, while a severe drought reduces the avocado harvest. In the market for avocados, these two events will definitely result in
a higher equilibrium price and a higher equilibrium quantity.
an indeterminate change in equilibrium price and a lower equilibrium quantity.
a lower equilibrium price and a higher equilibrium quantity.
a higher equilibrium price and an indeterminate change in equilibrium quantity.
Explanation
The increase in demand (rightward shift) and the decrease in supply (leftward shift) both put upward pressure on the equilibrium price, so the price will definitely increase. The increase in demand tends to increase quantity, while the decrease in supply tends to decrease quantity, making the overall effect on equilibrium quantity indeterminate.
Consider the market for electric bicycles. If the government offers a new subsidy to buyers and, at the same time, foreign manufacturers enter the market, what is the effect on equilibrium price and quantity?
Equilibrium price will decrease, and the effect on equilibrium quantity is indeterminate.
The effect on equilibrium price is indeterminate, and equilibrium quantity will increase.
The effect on equilibrium price is indeterminate, and equilibrium quantity will decrease.
Equilibrium price will increase, and the effect on equilibrium quantity is indeterminate.
Explanation
The subsidy to buyers increases demand (shifts right). The entry of new manufacturers increases supply (shifts right). Both shifts cause the equilibrium quantity to increase. However, the increase in demand puts upward pressure on price, while the increase in supply puts downward pressure on price, so the net effect on the equilibrium price is indeterminate.
When a shortage exists in a competitive market, which of the following correctly describes the market adjustment process toward equilibrium?
The price will rise, which will decrease the quantity demanded and increase the quantity supplied.
The price remains fixed while producers work to increase output to meet the excess demand.
The demand for the product will decrease on its own until it matches the available supply.
Sellers will lower their asking prices to encourage more consumers to enter the market.
Explanation
A shortage puts upward pressure on the price as buyers compete for limited goods. As the price rises, it causes a movement up along the demand curve (quantity demanded decreases) and a movement up along the supply curve (quantity supplied increases). This process continues until the shortage is eliminated and the market reaches equilibrium.
A new pest infests cotton crops across the country, significantly reducing the yield. Since cotton is a primary input for T-shirts, what will be the immediate impact on the market for cotton T-shirts?
The demand for T-shirts will decrease, leading to a lower equilibrium price and lower equilibrium quantity.
Both the supply of and demand for T-shirts will decrease, causing an indeterminate change in price.
The supply of T-shirts will increase as producers sell existing inventory, lowering the equilibrium price.
The supply of T-shirts will decrease, leading to a higher equilibrium price and lower equilibrium quantity.
Explanation
The reduced yield of cotton increases the price of a key input for T-shirt production. This increase in input cost leads to a decrease in the supply of T-shirts (a leftward shift of the supply curve), resulting in a higher equilibrium price and a lower equilibrium quantity.
Corn is a key ingredient in ethanol fuel. The government increases the legal requirement for ethanol content in gasoline. How will this policy affect the equilibrium price and quantity in the market for corn?
Equilibrium price will rise, and equilibrium quantity will rise.
Equilibrium price will fall, and equilibrium quantity will rise.
Equilibrium price will rise, and equilibrium quantity will fall.
Equilibrium price will fall, and equilibrium quantity will fall.
Explanation
The government mandate increases the demand for ethanol, which in turn increases the demand for corn from ethanol producers. This is represented by a rightward shift of the demand curve for corn, leading to a higher equilibrium price and a higher equilibrium quantity.
In a competitive market, the equilibrium price is the price at which the
number of sellers of the good is exactly equal to the number of buyers of the good.
producers of the good are able to earn the maximum possible economic profit.
quantity of the good supplied is equal to the quantity of the good demanded.
price of the good is at its legally mandated minimum or maximum level.
Explanation
Market equilibrium occurs at the specific price where the quantity that sellers are willing and able to sell is identical to the quantity that buyers are willing and able to purchase. This point represents a balance in the market with no inherent pressure for the price to change.
A shortage exists in a market for a good when
the supply of the good is substantially greater than the demand for the good, causing downward pressure on prices.
the current price is below the equilibrium price, leading to quantity demanded exceeding quantity supplied.
the government imposes a binding price floor, preventing the market price from falling to its equilibrium level.
consumer incomes decrease for a normal good, leading to a leftward shift in the demand curve and a lower price.
Explanation
A shortage, or excess demand, is a state of disequilibrium that occurs when the price is below the equilibrium level. At this lower price, consumers wish to buy more of the good than producers are willing to sell, creating upward pressure on the price.
A surplus occurs in a competitive market when
technological advancements lead to a rightward shift of the supply curve, creating a new, lower equilibrium price.
the current market price is above the equilibrium price, resulting in quantity supplied exceeding quantity demanded.
the market price is held below the equilibrium level by an effective government-imposed price ceiling.
the quantity demanded of a good is greater than the quantity supplied at the current market price.
Explanation
A surplus, or excess supply, is a state of disequilibrium where the current price is higher than the equilibrium price. At this elevated price, producers supply more of the good than consumers are willing to purchase, creating downward pressure on the price.