Bc200414239

Nimra khan
Assignment no 1
Eco 606

Question:

The Case: Pakistan is the sixth largest producer of cotton in the world. It also has the
third largest cotton spinning capacity in Asia. Thousands of ginning and spinning units
are producing textile products from cotton. Suppose the economic management of ABC
Textiles industries have found the following demand and supply functions for their textile
production.
Qd = 5500 – 4P Qs = 2500 + 6P Requirement:
1. Find out the equilibrium price and equilibrium quantity from the given demand
and supply functions. (Marks: 2.5+2.5)
2. Explain this market equilibrium condition with the help of graph. (Marks: 2.5)
3. If management introduces advance technology in production process, what will
be the impact on market equilibrium condition? Show graphically.

Solution:

Let's break down the solution:

1. Equilibrium Price and Quantity:

To find the equilibrium price and quantity, we need to set the demand and supply
functions equal to each other:

Qd = Qs
5500 - 4P = 2500 + 6P
Solving for P (price):
10P = 3000
P = 300
Now, substitute P into either the demand or supply function to find the equilibrium
quantity (Q):
Qd = 5500 - 4(300)
= 5500 - 1200
= 4300
So, the equilibrium price is Rs. 300, and the equilibrium quantity is 4300 units.

2. Market Equilibrium Graph:

The graph will have the demand curve (Qd) sloping downward and the supply curve
(Qs) sloping upward. The equilibrium point (E) is where the two curves intersect.
[Graph: Demand Curve (Qd) and Supply Curve (Qs) intersecting at point E (P=300,
Q=4300)]

3. Impact of Advanced Technology on Market Equilibrium:

If the management introduces advanced technology, it will increase efficiency and

reduce costs, leading to an increase in supply. The new supply function (Qs') will shift to
the right:

Qs' = 3500 + 6P

The demand function remains the same. To find the new equilibrium, we set the
demand and new supply functions equal:
Qd = Qs'
5500 - 4P = 3500 + 6P
Solving for P (price):
10P = 2000
P = 200
Now, substitute P into either the demand or new supply function to find the new
equilibrium quantity (Q):
Qd = 5500 - 4(200)
= 5500 - 800
= 4700
The new equilibrium price is Rs. 200, and the new equilibrium quantity is 4700 units.
[Graph: New Supply Curve (Qs') shifted to the right, intersecting with the Demand Curve
(Qd) at point E' (P=200, Q=4700)]

The introduction of advanced technology leads to a decrease in price (from Rs. 300 to
Rs. 200) and an increase in quantity (from 4300 to 4700 units).