Question

Suppose the demand and supply curves of a Commodity-X is given by the following two equations simultaneously:

Qd: 200 - P

Qs,=50+2p

(i) Find the equilibrium price and equilibrium quantity.

(ii) Suppose that the price of a factor of production producing the commodity has changed, resulting in the new supply curve given by the equation

Qs'=80+2p

Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity.

Answer 1

(i) We know that the equilibrium price and quantity are achieved at;

Qd=Qs,

200-P = 50 + 2P

(-) 3p = (-) 150

Therefore, Equilibrium Price p = 50

And, Equilibrium Quantity q = 200 - 50 = 150 units

(ii) If the price of factor of production has changed, then under the new conditions;

Qd=Qs

200-P=80+2P

(-)3p = (-)120

Therefore, Equilibrium Price p = 40

And, Equilibrium Quantity q = 200 - 40 = 160 units

Thus, as the equilibrium price is decreasing the equilibrium quantity is increased.