Question

Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation Qd = 120 – 20P, where Qd is the quantity demanded and P is the market price. The supply schedule can be represented by the equation Qs = 20 + 30P, where Qs is the quantity supplied.

Find the following:

a. The equilibrium price and quantity.

b. Suppose that the price is $3. Determine Qd and Qs.

c. At a price of $3, is there a surplus or a shortage in the market?

d. Given your answer in part c, will the price rise or fall in order to find the equilibrium point?

Answer 1

A) Equilibrium is achieved where demand and supply both are equal or the point on a graph where demand and supply curves intersect each other.

Demand

Q = 120 - 20P

Supply

Q = 20 + 30P

Equating both demand and supply

120 - 20P = 20 + 30P

120 - 20 = 20P + 30P

100 = 50P

P = 2

To find the equilibrium quantity we will use this price in any of the above two equations

Q = 20 + 30P

Q = 20 + 30(2)

Q = 80

Hence the equilibrium price is $2 and the equilibrium quantity is 80 units.

B) At price $3 quantity demand is

Q = 120 - 20P

Q = 120 - 20(3)

Q = 60

At price $3 quantity supply is

Q = 20 + 30P

Q = 20 + 30(3)

Q = 110

C) At a price of $3, demand is 60 units, and supply is $110 that means at a price of $3 people are demanding less, and producers are supplying more. Hence there is a surplus in the market.

Surplus = Supply - Demand

Surplus = 110 - 60

Surplus = 50

D) At a price of $3, there is a surplus in the market which means producers are supplying more than what consumers are demanding which means not all producers will able to sell in the market due to limited demand hence as a result suppliers will lower the price by this demand will increase because of the lesser price which will finally result in equilibrium where demand and supply both are equal.

So answering the question, the price will fall in order to achieve equilibrium point.