Question

Attempt all questions (20)
1. If demand of a product has function Qd=1120-22P and supply
function is Qs=20+25P then calculate demand and supply from P=15
to P=35. Draw or paste the table in following.
a. Estimate equilibrium price and quantity
b. Now change the demand and supply and show the effect on
equilibrium price

Answer 1

Answer:

Demand and Supply

In order to understand market equilibrium, we need to start with the laws of demand and supply. Recall that the law of demand says that as price decreases, consumers demand a higher quantity. Similarly, the law of supply says that when price decreases, producers supply a lower quantity.

Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market. These relationships are shown as the demand and supply curves in Figure 1, which is based on the data in Table 1, below.

The graph shows the demand and supply curves for gasoline; the two curves intersect at the point of equilibrium. The lines resemble an "X."

Figure 1. Demand and Supply for Gasoline

Table 1. Price, Quantity Demanded, and Quantity Supplied

Price (per gallon) Quantity demanded (millions of gallons) Quantity supplied (millions of gallons)

$1.00 800 500

$1.20 700 550

$1.40 600 600

$1.60 550 640

$1.80 500 680

$2.00 460 700

$2.20 420 720

If you look at either Figure 1 or Table 1, you’ll see that, at most prices, the amount that consumers want to buy (which we call quantity demanded) is different from the amount that producers want to sell (which we call quantity supplied). What does it mean when the quantity demanded and the quantity supplied aren’t the same? Answer: a surplus or a shortage.

Surplus or Excess Supply

Let’s consider one scenario in which the amount that producers want to sell doesn’t match the amount that consumers want to buy. Suppose that a market produces more than the quantity demanded. Let’s use our example of the price of a gallon of gasoline. Imagine that the price of a gallon of gasoline were $1.80 per gallon. This price is illustrated by the dashed horizontal line at the price of $1.80 per gallon in Figure 2, below.

Answer 2

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