Additional example of computation of equilibrium Price and Quantity

Q. Suppose in a two commodity market model, supply and demand functions are given as
Follows;
QS1 = -10 + 30 P1
QS2 = -12 + 64 P2
Qd1 = 164 - 6 P1 + 2 P2
Qd2 = 184 + 4 P1 – 8 P2
Required
(i) Explain the relationship between the two commodities giving valid economic reasons
(ii) Using the functions provided, calculate the equilibrium values of prices and quantities

Solution
(a) The relationship between the two commodities
-The two commodities are substitute of one another
- Cross Elasticity of the two is positive
(b) The equilibrium values of prices and quantities
Equilibrium requires that the Qd = Qs
1. Qd1 = QS1
-10 + 30 P1 = 164 - 6 P1 + 2 P2
36P1 - 2 P2 =174

2. Qd2 = QS2
184 + 4 P1 – 8 P2 = -12 + 64 P2
72P1 - 4 P2 =196
The problem is reduced to two equations and two unknowns
36P1 - 2 P2 =174 ………………………..(i)
72P1 - 4 P2 =196 …………………………..(ii)
Solving for P2 thro substitution Method gives P2 =3
Substituting P2 =3 to any of the equation in either (i) or (ii) gives P1= 5

Using P1 and P2 values substitute either into demand or supply function to get equilibrium quantity