Learning Outcomes Calculate the equilibrium price & quantity from linear demand/supply functions. Plot demand/supply curves from linear functions identifying the equilibrium price & quantity. State the quantity of excess demand/supply Given: Qd = 600 - 50P Qs = -200 + 150P 1. Calculate the Equilibrium Price & Quantity. 2. Assume the price of coffee beans increases thus affecting (supply or demand) by 200. a. Calculate the new schedule and plot the new curve. b. At $4 there is disequilibrium in the market. Calculate the excess demand/supply. c. Calculate the new equilibrium price & quantity. Equilibrium Price & Quantity Equilibrium Price Set the functions equal to each other and solve for P Qd = Qs 600 - 50P = -200 + 150P 800 = 200P P = $4 Equilibrium Quantity Plug equilibrium price $4 back into a function and solve for Qd or Qs. Both functions should result in the same result. Qd = 600 - 50P Qd = 600 - 50(4) Qd = 600 - 200 Qd = 400 Qs = -200 + 150P Qs = -200 + 150(4) Qs = -200 + 600 Qs = 400 At a Price of $4 and Quantity of 400 units the market is said to be in equilibrium as Qs = Qd. Shift in Supply The supply curve will shift left in response to the increase in the cost of coffee beans which is a non-price determinant of supply, increase factors of production. Qs = -200 + 150P A decrease of 200 units will decrease our c variable. Qs = -400 + 150P There will exist excess demand in the market. Qd > Qs at $4. This is calculated by calculating the Qs at the original market price of $4 and subtracting from the Qd (400). Qs = -400 + 150(4) Qd at a price of $4 is 400 Qs = -400 + 600 Qs = 200 Qd - Qs = excess demand 400 - 200 = 200
Excess Demand in the market at P = 4 is 200 New Price & Quantity Equilibrium The new equilibrium Price and Quantity after the increase in the price of coffee beans. P = $5 Q = 350
Qd = 600 - 50P Qs = -400 + 150P 600-50P = -400+150P 1000 = 200P P = $5 Qd=600-50(5) Qs=-400+150(5) Qd=600-250 Qs=-400+750 Qd=350 Qs=350 Conclusion. Given the functions: Qd = 600 - 50P and Qs = -200 + 150P the Price & Quantity equilibrium was $4 and 400 units. After an increase in the cost of coffee beans, an input in the production of espresso, the supply decreased causing excess demand of 200 espressos at P=$4. The excess demand sends a signal to the market to increase prices thus increasing the Qs and decreasing the Qd. With the increase in Price the excess demand is corrected and the market returns to equilibrium at P=$5 and Q = 350.