Question

Following are the demand and supply function of a market

QD A = 8000 - 1000Px, QS A = - 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)

$Q_D=8000-1000P_x$

$Q_S=-4000+2000P_x$

Market clearing price and quantity are found at the point where $Q_D=Q_S$

$8000-1000P_x=-4000+2000P_x$

$\implies P_x=4$

Quantity:

$=8000-1000(4)=4000$

Price: $P_x=4$

(ii)

(iii)

The equilibrium is stable.

This is because the system will gravitate back to initial equilibrium position after a shock is experienced.

The demand demand is negatively sloped while the supply curve is positively sloped.