Answer to Question #146128 in Economics of Enterprise for Syed Qasim

Question

Qd= 65 – 10P Qs= -35 + 15P
a. Find the equilibrium price and quantity and show it on labeled D/S diagram.
b. How do you interpret market equilibrium: (i) if P= Rs.6? (ii) if P=2?
c. Show on the Demand-Supply diagram in (a), the graphical interpretation of your answer of (b).

Answer 1

a. $\bold {Answers}$

Equilibrium price = $Rs.4$

Equilibrium quantity = $25 \space units$

$\bold {Solutions}$

Market equilibrium is determined when Qd = Qs.

$=> 65 - 10P = -35+15P$

$=> 65 + 35 = 15P + 10P$

$=> 100 = 25P$

Dividing by 25 both terms gives:

$P = Rs.4$

Substituting $4 in Qd gives:

$Q = 64 - 10(4)$

$= 65 - 40$

$25 \space units$

b. (i) When $P = Rs.6$ ,

$Qd = 65 - 10(6)$

$= 65 - 60$

$= 5 \space units$

$Qs = -35 + 15(6)$

$= -35 + 90$

$= 55 \space units$

Thus, when price is Rs. 6, quantity supplied exceeds quantity demanded by 50 units (55 - 5). There is excess supply or deficiency in demand in the market.

(ii) When price = Rs. 2

$Qd = 65 - 10(2)$

$= 65 - 20$

$= 45 \space units$

$Qs = -35 + 15(2)$

$= -35 + 30$

$= -5 \space units$

Thus, when price is Rs. 2, quantity demanded exceeds quantity supplied by 50 units (45 - - 5). There is, therefore, excess demand or shortages in the market.

c. Labelled on the diagram in A.