Question

Following are the demand and supply function of a market

QDA = 8000 - 1000Px, QSA= - 4000+2000Px

i) Find out the market clearing price and quantity.

ii) Plot, on one set of axes, the market demand curve and the market supply curve for commodity A and show the equilibrium point.

iii) Is the equilibrium stable? Explain.

Answer 1

(I)

$Qd=8000-1000p\\Qs=-4000+2000p\\Qd=Qs\\8000-1000p=-4000+2000p\\8000+4000=2000p+1000p\\12000=3000p\\p =4\\Q=8000-(1000×4)\\=4000units$

(ii)

(iii) Equilibrium is stable. This is because at point E demand and supply are at balance.