Question

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

Qd = 200 - p

Qs = 50 + 1p 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.