Worked example 1
The table shows the weekly market for bread in a town.
| Price ($) | Quantity demanded | Quantity supplied |
|---|---|---|
| 1.00 | 5 000 | 2 000 |
| 1.50 | 4 000 | 3 000 |
| 2.00 | 3 500 | 3 500 |
| 2.50 | 3 000 | 4 000 |
(a) State the equilibrium price and quantity. (b) Explain how the market would react if bakers charged $1.00. (c) State whether this question is microeconomic or macroeconomic, and why.
Show solution outline
Step 1 — Equilibrium (a): quantity demanded equals quantity supplied at $2.00, where 3 500 loaves are traded each week.
Step 2 — At $1.00 (b): buyers want 5 000 loaves but bakers supply only 2 000 — a shortage of 3 000. Bread sells out; some customers offer to pay more and bakers raise prices. As price rises quantity demanded contracts and quantity supplied extends until the shortage disappears at $2.00.
Step 3 — Classifying (c): this is microeconomics — it concerns a single market (bread in one town), not the economy as a whole. A question about the rate of inflation across the whole country would be macroeconomic.
Step 4 — Link to the price mechanism: the shortage signalled that bread was under-priced, higher prices gave bakers an incentive to supply more, and the rising price rationed the loaves to those willing to pay.