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.
(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.
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