In: Economics
The demand equation for good A is: Qd = 810 - 14P
The supply equation for good A is: Qs = 396 + 9P
a. Calculate the value of the free-market equilibrium price (P*) of good A.
b. Calculate the value of the free-market equilibrium quantity (Q*) of good A.
c. Suppose that a law requires that the regulated price of good A be set at $28. Indicate whether there would be excess demand or excess supply and calculate the value of the excess demand or excess supply.
Demand equation is as follows -
Qd = 810 - 14P
Supply equation is as follows -
Qs = 396 + 9P
At equilibrium, demand equals supply
Qd = Qs
810 - 14P = 396 + 9P
-14P - 9P = 396 - 810
-23P = -414
23P = 414
P = 414/23
P = 18
Putting the value of P in either demand equation or supply equation to ascertain equilibrium quantity.
Taking demand equation,
Qd = 810 - 14P
Qd = 810 - [14 * 18]
Qd = 810 - 252
Qd = 558
(a)
The value of the free market equilibrium price (P*) of good A is 18.
(b)
The value of the free market equilibrium quantity (Q*) of good A is 558.
(c)
Now, the price of good A is fixed at $28.
Calculate quantity demanded at new price -
Qd = 810 - 14P
Qd = 810 - (14 * 28)
Qd = 810 - 392
Qd = 418
The quantity demanded at new price is 418 units.
Calculate the quantity supplied at new price -
Qs = 396 + 9P
Qs = 396 + (9 * 28)
Qs = 396 + 252
Qs = 648
The quantity supplied at new price is 648 units.
It can be seen that at new regulated price, the quantity supplied exceeds the quantity demanded.
When quantity supplied exceeds the quantity demanded, there is excess supply.
Thus,
There would be excess supply.
Calculate the value of excess supply -
Excess supply = Quantity supplied - Quantity demanded
Excess supply = 648 units - 418 units = 230 units
Thus,
The value of excess supply is 230 units.