2.e.

The Algebra of Supply & Demand

Using the equation for a straight line, y = mx + b, we can determine the equations for the supply and
demand curve to be the following:
Demand: P = ! " #
$upply: P = % + #
&o solve for the equilibrium price and equilibrium quantity, set the demand equation equal to the supply
equation'
! " # = % + #
#( = )
Plug # bac* into either the demand or supply equation to solve for P
P( = ! " ) = +
D
$
!
%
P
#
D
$
#(
P(
D
ceiling
!
%
&o calculate the amount of shortage resulting from a price ceiling at ,), set the supply and demand curve
both equal to ,)
Demand: ) = ! " #
# = +
$upply: ) = % + #
# = %
THE AMOUNT OF SHORTAGE IS 9 3 = 6 UNITS
&o calculate the new equilibrium after imposing a ,! tax, set the new demand curve equal to the supply
curve' -.emember to solve for the equation of the new demand curve first'/
0quation of new demand curve: P = 1 " #
1 " # = % + #
# = %'!
Plug # into either the demand or supply curve equation to solve for Ps -price sellers will pay/
P = 1 " %'! = )'!
2ou can now calculate the price that buyers will pay -Pb/'
&o calculate Pb, set the new # value equal to the old demand curve
Pb = ! " # = ! " %'! = '!
$
shortage
!
)
%
% +
D
$
!
%
P
#
Dt
1
)'!
%'!
'!
D
$
!
%
P
#
floor
3
#' 4hat if a price floor of ,3 was imposed5 4hat would be the amount of surplus5
6' $et both the demand curve and supply curve equal to the price floor'
Demand: 3 = ! " #
# = %
$upply: 3 = % + #
# = +
THE AMOUNT OF SURPLUS IS 9 3 = 6 UNITS
#' 4hat if there was a subsidy of ,37 unit5 4hat would be the new quantity supplied -#s/5 4hat
price would suppliers pay -Ps/5 4hat price would buyers pay -Pb/5
6' &o solve for #s, set the equation of the new demand curve, equal to the supply curve'
0quation of new demand curve: P = 8 " #
D
$
!
%
P
#
Ds
8
1
9
) 8
D4:
8 " # = % + #
#s = 8
Plug #s into the old demand curve to solve for Pb
Pb = ! " # = ! " 8 = 9
Plug #s into the supply curve to solve for Ps
Ps = % + # = % + 8 = 1
2ou can use these values to even calculate D4:
6rea = ; <= = ; -3/-/ =