In: Economics
The market demand curve for commodity X is qD = 700-p. Now, let
us allow for free entry and exit of the firms producing commodity
X. Also assume the market consists of identical firms producing
commodity X. Let the supply curve if a single firm be explained
as:
qSf = 8+3p for p>20
= 0 for 0<p<20
a. What is the significance of p =20
Calculate the equilibrium quantity and number of firms at the
equilibrium price of 20.
The significance of P = 20 is that below this price, no seller would sell any of its goods in the market and the supply of the good will become zero. At P > 20, the supply curve exhibits a linear function. The price P = 20 is the break even price of the firms.
At equilibrium, Qd = Qs
Or, 700 - P = 8 + 3P
Or, 4P = 700 - 8 = 692
Or, P = 692/4 = 173
Thus the equilibrium price is P = 173
Now, equilibrium quantity , Q*d= 700 - P = 700 - 173 = 527