Suppose Shen is the only seller in the market for bottled water and Manuel is the only buyer. The following lists show the value Manuel places on a bottle of water and the cost Shen incurs to produce each bottle of water:Manuel's Value -------------------------- Shen's CostsValue of first bottle: $7 ------------- Cost of first bottle: $1Value of second bottle: $5 ------- Cost of second bottle: $3Value of third bottle: $3 ------------ Cost of third bottle: $5Value of fourth bottle: $1 ---------- Cost of fourth bottle: $7The following table shows their respective supply and demand schedules:Price ------------ Quantity Supplied --------- Quantity DemandedMore than $7 ----------- 4 ----------------------------- 0$5 to $7 ----------------- 3 ----------------------------- 1$3 to $5 ----------------- 2 ----------------------------- 2$1 to $3 ------------------ 1 ----------------------------- 3$1 or less ---------------- 0 ----------------------------- 4Use Shen's supply schedule and Manuel's demand schedule to find the quantity supplied and quantity demanded at prices of $2, $4, and $6. Enter these values in the following table.Price ----------- Quantity Supplied ---------- Quantity Demanded2 ------------------------- ? ----------------------------- ?4 ------------------------- ? ----------------------------- ?6 ------------------------- ? ----------------------------- ?A price of ___ brings supply and demand into equilibrium.At the equilibrium price, consumer surplus is $_, producer surplus is $_, and total surplus is $_.If Shen produced and Manuel consumed one less bottle of water, total surplus would _.If instead, Shen produced and Manuel consumed one additional bottle of water, total surplus would _.

The law of supply and demand combines two fundamental economic ideas that describe how changes in the price of a resource, commodity, or product affect its supply and demand.

Supply grows as the price rises, but demand drops. In contrast, as the price falls, supply is constrained and demand is increased.

Demand and supply levels for different prices can be displayed as curves on a graph. The intersection of these curves symbolizes the process of price discovery in the marketplace, as it indicates the balance, or market-clearing price, at which demand equals supply.

According to the law of demand, demand for a good or resource will decrease as its price increases and increase as its price decreases.

How to solve?

Price ------ Quantity Supplied ----- Quantity Demanded

2 --------------------- 1 ------------------------- 3

4 --------------------- 2 ------------------------ 2

6 --------------------- 3 ------------------------ 1

4 (quantity supplied = quantity demanded = 2)

4 ($7>$4 and $5>$4, $3<$4<$5, area above price line but under curve if price line was at $4, $7-$4=$3, $5-$4=$1, $3+$1=$4); 4 ($1<$4 and $3<$4, $3<$4<$5, area below price line and under curve if price line at $4, $4-$1=$3, $4-$3=$1, $3+$1=$4); 8 ($4 from consumer surplus + $4 from producer surplus)

fall (equilibrium = 2, 2-1=1, Shen: quantity supplied = 1 -> $2, Manuel: quantity demanded = 1 -> $6, total surplus = producer surplus + consumer surplus = ($4-$1)+($7-$4)=$6, $8>$6)

rise (equilibrium = 2, 2+1=3, Manuel: quantity demanded = 3 -> $2, Shen: quantity supplied = 3 -> $6, total surplus = consumer surplus + producer surplus = ($3-$2)+($7-$6)=$2, $8>$2, $6>$2)

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