Question

Business Economics

Suppose the demand equation for computers by Teetan Ltd for the year 2017 is given by Qd= 1200-P and the supply equation is given by Qs= 120+3P. Find the equilibrium price and analyze what would be the excess demand or supply if the price changes to Rs 400 and Rs 120. The answer should be a min of 800 Words. And pls send me in computerized word format

Answer 1

Q_d = 1200 - P

Q_s = 120 + 3P

At equilibrium, supply of computers supplied will be equal to the demand for computers demanded. This is because, if the demand or supply of the computers do not match each other, there would incentive for one party to demand or supply more to reach the equilibrium. For example, if the demand is more than supply, there is incentive for the suppliers to produce more to match the demand. Similarly, if the supply exceeds the demand for computers, there would be incentive for the consumers to demand more. This will cause the quantity of computers supplied become equal to the quantity of computers demanded.

Therefore, equating supply and demand of the computers, we get

1200 - P = 120 + 3P

=> 4P = 1200 - 120 = 1080

> P = 1080 / 4 = 270

At P = 270, Q = 1200 - 270 = 930

Therefore, at the equilibrium, P = 270 and Q = 930. At P = 20 and Q = 930, both the supply and demand for computers are equal. This would mean that Teetan Ltd would produce 930 computers and supply them at a price point of 270. The consumers would buy all the computers produced by Teetan Ltd at the same price point of 270. Thi would ensure that there are no excess computers supplied or demanded.

Now let us consider the scenario where the price of one computer changes to 400 from the equilibrium price of 270

Q_d = 1200 - P

Substituting P = 400, we get

New quantity of computers demanded = 1200 - 400

=> New quantity of computers demanded = 800

Q_s = 120 + 3P

Substituting P = 400, we get

New quantity of computers supplied = 120 + 1200

=> New quantity of computers supplied = 1320

As we can see, the new quantity demanded is lower than the new quantity supplied. Therefore, there would be excess supply at P = 400.

Excess quantity of computers supplied = New supply - New demand

Excess quantity of computers supplied = 1320 - 800

Excess quantity of computers supplied = 520

Therefore, there would be an excess supply of 520 computers are P = 400.

This happens because the new price has now increased to 400. At a higher price, suppliers are willing to produce more since a higher price would result in higher profits for the producers. However, at a higher price, it becomes costlier for the consumers to buy computers. This is reflected by a drop in demand. This mismatch between the supply and demand of consumers creates an excess supply of computers. However, now because of the mismatch in the demand and supply of the computers, the producers will now start to decrease the price they charge from the consumers for the computers. This is because they now notice that the supply for the computers exceeds the demand. This reduction in prices would simulate more demand from the consumers for the computers. This will keep on happening till they achieve the equilibrium price and quantity.

Now let us consider the scenario where the price of one computer changes to 120 from the equilibrium price of 270

Q_d = 1200 - P

Substituting P = 120, we get

New quantity of computers demanded = 1200 - 120

=> New quantity of computers demanded = 1080

Q_s = 120 + 3P

Substituting P = 120, we get

New quantity of computers supplied = 120 + 360

=> New quantity of computers supplied = 480

As we can see, the new quantity demanded is higher than the new quantity supplied. Therefore, there would be excess supply at P = 120.

Excess quantity of computers demanded = New demand - New supply

Excess quantity of computers demanded = 1080 - 480

Excess quantity of computers demanded = 600

Therefore, there would be an excess demand of 600 computers are P = 120.

This happens because the new price has now decreased to 120. At a lower price, suppliers want to produce lesser number of computers since a lower price would result in lower profits for the producers. However, at a lower price, it becomes less costlier for the consumers to buy computers. Therefore, the demand for the computers goes up significantly. This mismatch between the supply and demand of computers between the consumers and producers creates an excess demand for computers. However, now because of the mismatch in the demand and supply, the producers will now start to increase the price they charge from the consumers for the computers. This is because they now notice that the demand for the computers exceeds the supply. As the price now starts to increase, producers start to produce more. This will keep on happening till they achieve the equilibrium price and quantity.