Question

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.

Answer 1

a) If P=20,then it indicates that the minimum average cost of the firm is ₹20 and the firm will not supply or produce commodity X for any price less than ₹20.<br>

Calculation of Equilibrium quantity:

Formula: q^​​​​​​​​​^{​​​​D}

It can be calculated by putting the value of equilibrium price of ₹20 in the market Demand curve.

Or

Equilibrium Quantity= 700-20 = 680 units .<br>

Calculation of number of firms at the equilibrium price of ₹20:

The number of firms can be calculated by dividing the equilibrium quantity by quantity supplied by each firm.

Quantity supplied by a single firm can be calculated by putting the value of equilibrium price of ₹20 in the supply curve.

q^{​​​​​​s_{​t = 8+3*20 = 68 units.}}

Quantity supplied by each firm will be 68 units as there are identical producing commodity X.

Number of firms =

=

=10 Firms.

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