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

Qd= 40- 3P

-P= 5-0.5 Qs

a)

If P= 10, then

Quantity demand: Qd= 40-3(10)= 40-30= 10

Quantity supply:

-P= 5-0.5Qs

-10=5-0.5Qs

0.5Qs = 15

Qs= 15/0.5= 30

b)

Two determinants of demand:

• Price of the commodity: There is a negative relationship between price of the good and its quantity demand that is If price increases it cause quantity demand for the good to decrease.
• Income of the consumer: Generally as income increases the demand for the good also increases. But there can be two type of goods: a) Inferior good are those goods for which demand decreases with increase in income. b) Normal or luxury goods are those goods for which demand increases with increase in income.

Two determinants of Supply:

• Price of the commodity: There is a positive relationship between price of the good and its quantity supply that is If price increases it cause quantity supply for the good to increase.
• Cost of the input: If cost of input to produce a good rises it will cause the profit of the producer to decrease which cause producer to supply less into the market. So there is a negative relationship between cost of the input and supply of the good.

c)

Qd=40- 3P

-P= 5-0.5 Qs

Multiply by -1 on both side in supply equation

P= 0.5Qs-5

0.5Qs = P+5

Qs= 2P+10

Equilibrium:

Demand = Supply

40-3P = 2P+10

30= 5P

P*= 6 Equilibrium price

Put value of P* in Qd

Q*= 40-3(6)= 22 Equilibrium quantity

d)

In the graph below, price on Y axis and quantity on X axis. DD is the demand curve and SS is the suply curve.

E is the point of equilibrium where DD=SS, P*=6 is the equilibrium price and Q*=22 is the equilibrium quanity.