Question

Assume the market demand of 500mls of mineral water is given by: Qd= 40- 3P and the market supply being : -P= 5-0.5 Qs a) What is the quantity demand and supplied if the price of 500mls of mineral water is K10. Comment. on your answer b) Discuss two determinants of demand and two determinants of supply. (4marks) c) Derive the equilibrium price and output mineral water. d) Illustrate your answer graphically confirming your other answers above. (4 mar

Answer 1

Given Qd = 40-3P and 0.5Qs = 5+ P = Q's = 10 + 2P.

a) when price = 10 then the quantity demand(Qd) = 40 - 3(10) = 10. And quantity supply(Q's) = 10+ 2(10) = 30.

b) determinants of Demand.

Price of given goods= Generally there exits an inverse relationship between price and quantity Demanded. It means as price level increases, quantity Demanded falls due to decrease in the satisfaction level of consumer.

Taste and preferences - taste and preferences of the consumer directly influence the Demand for a commodit. They include changes in fashion, customs, habits, etc.  

Determinants of supply

State of technology = advanced and improve technology reduces the cost of production, which raises the profit margin. It induce the seller to increase the supply. And vice versa.

Government policy( taxation policy) = increase in taxes raises the cost of proy and thus, reduces the supply, due to lower profit margin. And vice versa.

C) equilibrium price and quantity when Qd = Qs so 40-3P = 10+2P so 5P = 30 so P = 6 and Q = 40- 3(6) = 22. So equilibrium price = 6 and equlibrium quantity is 22.

D)