Demand and supply mathematics

Illustration

1) The demand and supply functions of a certain product are given as follows:

Demand function: Qd = 240 -2p

Supply function: Qs = -40 + 3p

Determine the equilibrium price and quantity.

SOLUTION

Qd = Qs

Hence 240 – 2p = -40 + 3p

Like terms together,

-2p – 3p = -40 – 240,

-5p = -280

P = 56 and Q =?

Take any of the functions,

I.e. Qd = 240 – 2p,

Qd = 240 – 2(56)

Q = 128.

Equilibrium quantity; 128, Price: $56

2. Consumers demand 44 units of a given product and the price is $2 per unit and

35 units when the price is $5 per unit. On the other side the seller supplies 40

units at $10 per unit and 15 units at $5 per unit.

a) Determine demand and supply functions

b) Determine the equilibrium price and quantity

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 SOLUTION

Demand Supply

Qty Price Qty Price

44 $2 40 $10

35 $5 15 $5

a) Determine demand and supply functions

Demand:

Qd = a + bP Qs = c + dP

44 = a + 2b 40 = c + 10d

35 = a + 5b 15 = c + 5d

9 = -3b 25 = 5d

b = -3 and a = 50. d = 5 and c = -10

Qd = 50 – 3P Qs = -10 + 5P

Since Qd = Qs

50 – 3P = -10 + 5P

-3p – 5p = -10 – 50

-8p = -60

P = 7.5 and

Q = 50 – 3(7.5) = 27.5

Equilibrium quantity: 27.5, Price: $7.5

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 IMPACT OF GOVERNEMNT POLICY ON DEMAND AND SUPPLY

a) Impact of taxation on equilibrium price and quantity.

Refer to example (1) Qd = 240 – 2P and Qs = -40 +3P.

The government imposes a tax of kshs 5 per unit. Find the new equilibrium price

and quantity after the tax.

SOLUTION

Tax only affects the supply function hence:

Qs = -40 + 3P

Make price subject of formula,

P = Qs/3 + 40/3

Taxed Price will be: Pt = (Qs/3 + 40/3) + 5

3Pt = Qs + 55

Qs = 3Pt – 55

Since Qs = Qd, then

3Pt – 55 = 240 – 2P

3Pt +2p = 240 + 55

5Pt = 295

Pt = 59 and Quantity after tax is 240 – 2(59)

Q = 122.

Equilibrium quantity= 122; Equilibrium price= Kshs 59

Distribution of tax between seller (producer) and buyer (consumer)

Tax payable by buyer: This is taxed equilibrium price minus initial equilibrium price.

(Pt – P)

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Tax payable by seller: This is total tax minus tax paid by buyer. (T – Tb).

ILLUSTRATION

Refer to above question

Find how the seller and Buyer share the tax.

SOLUTION

Tax payable by consumer,

Pt –P

= 59 – 56

= Kshs 3

Tax Payable by Seller,

Tax – Tax paid by buyer

= 5- 3

=Kshs2

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 b) Impact of subsidy on equilibrium price and quantity.

Subsidy has an effect of reducing the price of a commodity and also affects the supply

function only.

ILLUSTRATION

Refer to question (1) Qd = 240 – 2P and Qs = -40 +3P.

The government imposes a subsidy of kshs 3 per unit. Find the new equilibrium price and

quantity.

SOLUTION

Subsidy reduces price by affecting the supply function

If Qs = -40 +3P

Make P subject of formula.

Pt = (Qs/3 + 40/3) - 3

3Pt = Qs + 31

Qs = 3P – 31

And since Qs = Qd at Equilibrium, then

3P – 31 = 240 – 2P

271 = 5P

P = 54.2 and Q = 240 – 2(54.2)

Q = 131.6.

Equilibrium quantity= 131.6; Equilibrium Price= Kshs 54.2

Distribution of Subsidy between buyers and Sellers

Illustration: Refer to above example,

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SOLUTION

Subsidy to buyers:

Initial Equilibrium Price less

equilibrium price with subsidy

P – Ps

= 56 – 54.2,

= Kshs 1.80

Subsidy to sellers

Total Subsidy minus subsidy to buyers

S – Sb

3 – 1.80

= Kshs 1.20