Question

Given a demand curve Qd = 5000 - 300P and supply curve Qs = -300 + 600P, what are the equilibrium price and quantity levels that could be expected for this product?

How would the demand function be affected by each of the following actions?

1) A decrease in the number of suppliers of the product?

2) A reduction in personal income of buyers in the market?

3) Strong evidence of higher demand among millennials because of a recent advertising campaign?

4) The price of a competitive product announced by 40% increase in prices?

Considering the equilibrium price/quantity calculations and associated adjustments as outlined above, please provide a brief narrative of the potential success of this product?

Answer 1

At equilibrium quantity, quantity demanded = quantity supplied.

Therefore replacing Qd and Qs will Qe, gives us following equations,

Qe = 5000-300P and Qe = -300 +600P

Solving above linear equations,

P = 5.89

Qe = 3233 unit

Therefore equilibrium price and quantity are 5.89 and 3233 units respectively

Impact of events on demand function:

1) A decrease in the number of suppliers of the product? No impact. It will impact the supply function

2) A reduction in personal income of buyers in the market? will lead to decrease in demand

3) Strong evidence of higher demand among millennials because of a recent advertising campaign? will lead to increase in demand

4) The price of a competitive product announced by 40% increase in prices? will lead to increase in demand as the customers of competitive product will look for alternative product

Basis above, product should be successful due to following reasons:

1. Decrease in number of suppliers
2. Strong evidence of higher demand among millennials
3. Price of a competitive product announced 40% increase in price