Theory question 102
Price DeterminationSection A (answer one question only from this section)
The demand and supply function of a commodity are given as follows:
Quantity demanded (Qd) = 20 − 2P
Quantity supplied (Qs) = 6P − 12, where P = price in naira.
(a) Determine the equilibrium price and quantity bought and sold at that price
(b) If the price of the commodity is fixed at N6.00, what is the magnitude of the excess supply?
Show the model answer
Model answer
(a) At equilibrium Qd = Qs: 20 − 2P = 6P − 12, so 32 = 8P and P = N4
Quantity: Qd = 20 − 2(4) = 12 units (check Qs = 6(4) − 12 = 12)
(b) At N6: Qd = 20 − 12 = 8 units; Qs = 36 − 12 = 24 units
Excess supply = 24 − 8 = 16 units
Explanation
Excess supply = quantity supplied − quantity demanded at the fixed price.