Theory question 102
Price DeterminationThe market for apples is represented by the following demand and supply functions:
Qd = 30 − P; Qs = 15 + 2P.
(a) Prepare a demand and supply schedule for the market, given the prices $2.00, $4.00 and $7.00.
(b) (i) Determine the equilibrium price and equilibrium quantity of apples in the market. (ii) If the price of apple is fixed at $3.00, what will be the excess demand or excess supply?
(c) Suppose the demand function changed to Qd = 40 − P. Using the prices in (a) above: (i) prepare a new demand schedule; (ii) does it represent an increase or a decrease in demand? (iii) explain your answer in (c)(ii) above.
Show the model answer
(a) Price $2: Qd = 28, Qs = 19; Price $4: Qd = 26, Qs = 23; Price $7: Qd = 23, Qs = 29
(b)(i) 30 − P = 15 + 2P → 3P = 15 → P = $5; Q = 25 apples
(ii) At $3: Qd = 27, Qs = 21 → excess demand of 6
(c)(i) Price $2: 38; $4: 36; $7: 33
(ii) An increase in demand.
(iii) At every price more is demanded than before (10 more units), so the demand curve has shifted to the right.
Equilibrium is where Qd = Qs.