The daily demand for bottled water is 35 bottles when the price is set at $1. However, if the price is raised to $5, the demand is only 5 bottles. The bottled water producer is willing to supply 40 bottles if the price is set at $5 per bottle, but will only supply 10 bottles if the price is set at $2. Draw the supply and demand curves for the water bottles on the graph below. Label each curve and each axis. At what level does equilibrium occur? What are the areas of surplus and shortage?
What will be an ideal response?
The vertical axis should be labeled as price, and the horizontal axis should be labeled as quantity. The demand curve should show a negative slope, crossing the positively sloped supply curve at the equilibrium point of $3 and 20 units. Surplus occurs in the area between the curves and above the equilibrium point while shortage occurs below the equilibrium point.
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