Practice Problems - Supply and Demand - Shortages/Surpluses/Clearing the Market/Price Controls

Not to be Turned In - For Your Own Study Use

1.  Draw a supply and demand situation where there is a shortage (and define what a shortage is).  Clearly show where the shortage is on the graph.

2.  Draw a supply and demand situation where there is a surplus (and define what a surplus is).  Clearly show where the surplus is on the graph.

3.  Assume the market clearing price is $20 and the market clearing quantity is 500 for a steak dinner.  But you don't have this information (you being a supplier of steak dinners) and have just opened your steak house.  You decide to price your steak dinners at $15.00.  You notice that when you do this you could have sold 650 steak dinners but are willing and able to sell only 400.  Draw this situation on a graph.  Put all numbers given on your graph.  What will happen in this market?  Will there be a shortage or a surplus?  Show this on your graph.  Then explain what will happen in this market (assume there are no price controls).

4.  If the government puts a price floor above the market clearing price, what will happen in this market?  Show graphically.

5.  If the government puts a price floor below the market clearing price, what will happen in this market? 

6.  What are inventory costs?  Give examples of both kinds.

7.  What does a shortage signal suppliers to do?  Why?

8.  What does a surplus signal suppliers to do?  Why?