Equilibrium Price and Quantity (Essay Sample)

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Equilibrium Price and Quantity
* Student Name
University Name
Graphical Representation of the Supply and Demand Curves
* The equilibrium price and quantity occurs at the point where the quantity supplied and the quantity demanded are equal (Broadstock, 2003). Where the supply and demand curves intersect. Hence, in this market, the equilibrium price is $6 and the equilibrium quantity is 81 pizzas.
* If the market price is above the equilibrium price, the quantity supplied is more than the quantity demanded creating a surplus (Broadstock, 2003). The market price will hence fall. Therefore the surplus drives price down to equilibrium.
* If the actual price in the market is below the equilibrium price, the quantity supplied is less than the quantity demanded creating a shortage (Broadstock, 2003). Therefore, the shortage will drive the market towards the equilibrium.


1 American and Japanese workers can each produce 4 cars a year. An American worker can produce 10 tons of grain a year, whereas a Japanese worker can produce 5 tons of grain a year. To keep things simple, assume that each country has 100 million workers.
* For this situation, construct a table analogous to Table 1.
Country

Workers needed to make one car

Workers needed to make one ton of grain

U.S

1/4

1/10

Japan

1/4

1/5

b. Graph the production possibilities frontier for the American and Japanese economies.
With one hundred million workers and four cars per worker, if either economy was dedicated fully to cars, it would make four hundred million cars. Since each U.S. worker can produce 10 tons of grain, if the United States produced only grain it could produce one thousand million tons. Since each Japanese worker can produce five tons of grain, if Japan produced only grain it could produce five hundred million tons. These are the intercepts of the production possibilities frontiers. Since the tradeoff between cars and grain does not change, the production possibilities frontier is a straight line. These yields below:
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* For the United States, what is the opportunity cost of a car? Of grain? For Japan, what is the opportunity cost of a car? Of grain? Put this information in a table analogous to Table 1
Since each U.S. worker produces either four cars or ten tons of grain, the opportunity cost of one car is two and a half tons of grain, which is ten divided by four. Since each Japanese worker produces either four cars or five tons of grain, the opportunity cost of one car is one and a quarter tons of grain, which is five divided by four. Equally, the U.S. opportunity cost of one ton of grain is 2/5 car (4 divided by 10) and the Japanese opportunity cost of one ton of grain is 4/5 car (4 divided by 5). This yields table below:
Country

Opportunity cost of 1 car in terms of tons of grain given up

Opportunity cost of 1 ton of grain in terms of cars given up

U.S

2 1/2

2/5

Japan

1 1/4

4/5

d. Which country has an absolute advantage in producing cars? In producing grain?
Neither country has an absolute advantage in producing cars, since they are equally productive since they have the same output per worker; the United States has an absolute advantage in producing grain, since it is more productive in that it has greater output per worker.
e. Which country has a comparative advantage in producing cars? In producing grain?
Japan has a comparative advantage in producing cars, since it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain, since it has a lower opportunity cost in terms of cars given up.
* Without trade, half of each country's workers produce ...