MATHEMATICS

Lecture Notes
5. Market Equilibrium Point Analysis
Assoc. Prof. Dr. Samet GÜNER
Learning Goals
• Understanding of supply, demand and market concepts
• Understanding the relationship between these concepts
• Performing price and quantity analysis regarding the market equilibrium point

Sakarya Business School, Mathematics Lecture Notes 2

Nature of Supply and Demand
Quantity demanded: The amount of a product that consumers are willing and able
to buy.
Law of demand: There is a negative relationship between price and quantity
demanded.

Quantity supplied: The amount of a product that firms are willing and able to sell.
Law of supply: There is a positive relationship between price and quantity supplied.

Sakarya Business School, Mathematics Lecture Notes 3

 Market Equilibrium Point
In a free competitive market, the price of a product is determined by the
relationship between supply and demand. The price tends to stabilize at the point
of intersection of the demand and supply equations.
This point of intersection is called the equilibrium point.
The corresponding price is called the equilibrium price.
The common value of supply and demand is called the equilibrium quantity.

Hint: The basic logic of market equilibrium analysis is the same as break-even analysis! In
BEP analysis, we find the point where total revenue and total cost are equal. In MEP
analysis, we will find the point where the supply and demand functions are equal. There
is no operational difference between the two subjects. Only the application area and
interpretation will change.

Sakarya Business School, Mathematics Lecture Notes 4

 Supply – The higher the
price, the higher the
quantity.

MEP
Demand– The higher
the price, the lower the
quantity.

Sakarya Business School, Mathematics Lecture Notes 5

 An illustration

Assume the price and demand for a notebook in a free competitive market.

Price (P) Supply – Producer (Q) Demand – Customers (Q)

equilibrium 20 100 0
equilibrium
price 15 80 20
quantity
10 60 30
5 40 40
2 20 80
1 0 100

Sakarya Business School, Mathematics Lecture Notes 6

Example: Supply and demand functions of a product are 𝑃 = −3𝑄 + 36 and
𝑃 = 4𝑄 + 1.
a) Which is the supply and which is the demand function?
b) Find the equilibrium quantity
c) Find the equilibrium price
d) Draw the market equilibrium chart

Sakarya Business School, Mathematics Lecture Notes 7

a) Which is the supply and which is the demand function?
The function with negative slope is the demand, with positive slope is supply.

b) Find the equilibrium quantity.

Market equilibrium quantity occurs where the supply and demand functions are equal.
Demand= Supply
−3𝑄 + 36 = 4𝑄 + 1
7𝑄 = 35 → 𝑄 = 5 𝑝𝑖𝑒𝑐𝑒𝑠
c) Find the equilibrium price.
Since the market equilibrium quantity is 5, we can find the market equilibrium price by
substituting this value in the demand function whether we want it. Both will give the
same result.
𝑄 =5→4 5 +1
𝑃 = $21

Sakarya Business School, Mathematics Lecture Notes 8

d) The market equilibrium chart
For the MEP chart, supply and demand are plotted separately. MEP is shown where
these two functions intersect.

Demand: 𝑃 = −3𝑄 + 36 Supply

𝑄 = 0 → 𝑃 = 36
𝑃 = 0 → 𝑄 = 12
MEP
Supply: 𝑃 = 4𝑄 + 1
𝑄=0→𝑃=1
𝑃 = 0 → 𝑄 = −0.25 Demand

Sakarya Business School, Mathematics Lecture Notes 9

Example: Demand function of a product is 𝑄 = 60 − 4𝑃. It is known that the supply is 9
units if the price is $4, and its increases to 10 units when the price increases to $5. Find
the equilibrium price.
For MEP, we need supply and demand functions. In the question, demand equation is
given, but not the supply equation. First, the supply function should be established by
using the information about the supply.
Price (P) Quantity(Q)
4 (P1) 9 (Q1)
5 (P2) 10 (Q2)

Let’s replace these values into the following formula.

𝑄 − 𝑄1 𝑄2 − 𝑄1
=
𝑃 − 𝑃1 𝑃2 − 𝑃1

Sakarya Business School, Mathematics Lecture Notes 10

 𝑄 − 9 10 − 9 𝑄−9 1
= → =
𝑃−4 5−4 𝑃−4 1

we get the demand function:

𝑄 =𝑃+5

Now that we have the supply function, we can find the MEP.

60 − 4𝑃 = 𝑃 + 5
𝑃 = $11 𝑀𝑃 𝑝𝑟𝑖𝑐𝑒

We can find the ME quantity by substituting the ME price into supply or demand
function.
𝑃 = 11 → 𝑄 = 11 + 5 = 16 𝑢𝑛𝑖𝑡𝑠 (𝑀𝐸 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦)

Sakarya Business School, Mathematics Lecture Notes 11

Example: Supply function is 𝑃 = 𝑄2 + 100 and the demand function is 𝑃 = −20𝑄 +
2500. Find the market equilibrium point and draw the graph.

𝑆𝑢𝑝𝑝𝑙𝑦 = 𝐷𝑒𝑚𝑎𝑛𝑑
𝑄2 + 100 = −20𝑄 + 2500
𝑄2 + 20𝑄 − 2400 = 0
Following roots can be found by factorising:
𝑄1 = −60 𝑎𝑛𝑑 𝑄2 = 40
Hint: There are two PDN quantities, -60 and 40. However, although -60 is
mathematically correct, it is not considered since a negative supply/demand quantity is
not practical.

If we replace 40 into suuply or demand function:

𝑃 = 402 + 100 → 𝑃 = $1700

Sakarya Business School, Mathematics Lecture Notes 12
Supply Function
1) 𝑄 = 0 → 𝑃 = 100
2) 𝑃 = 0 → 𝑄 𝑛𝑜 𝑟𝑜𝑜𝑡
3) Opens upward
−0 Supply
4) 𝑉𝑒𝑟𝑡𝑒𝑥 = = (0,100)
2

MEP-2
Demand Function
MEP-1
1) 𝑄 = 0 → 𝑃 = 2500
2) 𝑃 = 0 → 𝑄 = 125 Demand

Sakarya Business School, Mathematics Lecture Notes 13

Example: At a price of $2,50 per kilo, the annual supply and demand for corn are 8.5
and 9.8 thousand tone, respectively. When the price rises to $3,30, the supply increases
to 10.5 thousand tone while the demand decreases to 7.8 thousand tone. Find the
supply and demand equations and find the equilibrium point for the US corn market.

For MEP, we need to know the supply and demand equations. Information on supply
and demand is given in the question. Using this information, we can obtain equations
with the help of the formula below. Then we can then find the PDN by equalizing the
supply / demand equations.

𝑄 − 𝑄1 𝑄2 − 𝑄1
=
𝑃 − 𝑃1 𝑃2 − 𝑃1

Sakarya Business School, Mathematics Lecture Notes 14

Information on the supply is as follows: Information on the demand is as follows:
P Supply P Demand
2.5 (P1) 8.5 (Q1) 2.5 (P1) 9.8 (Q1)
3.3 (P2) 10.5 (Q2) 3.3 (P2) 7.8 (Q2)

𝑄 − 8.5 10.5 − 8.5 𝑄 − 9.8 7.8 − 9.8

= =
𝑃 − 2.5 3.3 − 2.5 𝑃 − 2.5 3.3 − 2.5

𝑄 − 8.5 2 𝑄 − 8.5 −2
= =
𝑃 − 2.5 0,8 𝑃 − 2.5 0.8

The supply function: The demand function:

𝑃 = 0.4𝑄 − 0.9 𝑃 = −0.4𝑄 + 6.42

Sakarya Business School, Mathematics Lecture Notes 15

MEP can be calculated by equating the supply and demand functions.

𝑆𝑢𝑝𝑝𝑙𝑦 = 𝐷𝑒𝑚𝑎𝑛𝑑
0.4𝑄 − 0,9 = −0,4𝑄 + 6.42
0.8𝑄 = 7.32
𝑄 = 9.15 𝑢𝑛𝑖𝑡𝑠

Since the ME quantity is 9.15, we find the ME price by typing it into the supply or
demand equation.

𝑃 = 0.4(9.15) − 0,9
𝑃 = $2.76

Sakarya Business School, Mathematics Lecture Notes 16

Example: Some information about world crude oil market given below. Answer the
questions.
a. Suppose that the daily demand for crude oil is 76.1 million barrels when the price is
$25,52 per barrel and this demand drops to 74,9 million barrels when the price rises to
$33,68. Find the demand function and predict the demand if the price rises to $39,12
per barrel.
b. The daily supply for crude oil also varies with the price. Suppose that the daily supply
is 73,4 million barrels when the price is $23,84 and this supply rises to 77,4 million
barrels when the price rises to $34,24. Find the supply function and predict the supply
if the price drops to $20,98 per barrel.
c. Find the market equilibrium quantity and price for world crude oil market.
d. Draw the graph for market equilibrium analysis.

Sakarya Business School, Mathematics Lecture Notes 17

a. The values on demand are summarized in the table below:

P Q Let’s replace Q1, Q2, P1 ve P2:

$25.52 (P1) 76.1 (Q1)
$33.68 (P2) 74.9 (Q2) 𝑄 − 76.1 74.9 − 76.1
=
$39.12 ? 𝑃 − 25.52 33.68 − 25.52

−1.2𝑃 + 30,624 = 8.16𝑄 − 620.976

−1,2𝑃 = 8,16𝑄 − 651.6
We can obtain the demand function if we solve the equation for P:
𝑃 = −6,8𝑄 + 543
If we replace 39.12 into demand function:
39,12 = −6,8𝑥 + 543 →= 6,8𝑄 = 503,8 → 𝑄 = 74.1

So when the price is $ 39.12, the daily demand will be 74.1 million barrels.

Sakarya Business School, Mathematics Lecture Notes 18

b. The values on demand are summarized in the table below:

P Q Let’s replace Q1, Q2, P1 ve P2:

$23.84 (P1) 73.4 (Q1)
$34.24 (P2) 77.4 (Q2) 𝑄 − 73.4 77.4 − 73.4
=
$20.98 ? 𝑃 − 23.84 34.24 − 23.84

4𝑃 − 95.36 = 10.4𝑄 − 763.36

4𝑃 = 10.4𝑄 − 668
We can obtain the supply function if we solve the equation for P:
𝑃 = 2,6𝑄 − 167
If we replace 20.98 into supply function:
20.98 = 2,6𝑄 − 167 → 2.6𝑄 = 187.98 → 𝑄 = 72,3

So when the price is $20.98, the daily demand will be 72.3 million barrels.

Sakarya Business School, Mathematics Lecture Notes 19

c. The market equilibrium point for world crude oil market.

For the oil market, MEP will occur at the point where the supply and demand functions
are equal. We found these functions in previous cases.

𝐷𝑒𝑚𝑎𝑛𝑑 = 𝑆𝑢𝑝𝑝𝑙𝑦
−6,8𝑄 + 543 = 2,6𝑄 − 167

9.4𝑄 = 710 → 𝑄 = 75.532

The ME quantity is 75.532 million barrels. If we substitute this value in the supply or
demand function:
𝑃 = −6,8(75.532) + 543
𝑃 = 29,38
The ME price is $29.38.

Sakarya Business School, Mathematics Lecture Notes 20

d. The graph for market equilibrium point

Both functions are linear.

Demand
𝑫𝒆𝒎𝒂𝒏𝒅: 𝑃 = −6,8𝑄 + 543
𝑄 = 0 → 𝑃 = 543
𝑃 = 0 → 𝑄 = 79,85 Supply

𝑺𝒖𝒑𝒑𝒍𝒚: 𝑃 = 2,6𝑄 − 167

𝑄 = 0 → 𝑃 = −167
𝑃 = 0 → 𝑄 = 64.23

Sakarya Business School, Mathematics Lecture Notes 21

Example: Supply function of a product is 𝑃 = 2𝑄 + 4. It is known that the demand is 15
units if the price is $6, and its decreases to 10 units when the price increases to $16.

a. Write the demand function.

b. Find the market equilibrium price and quantity.

Sakarya Business School, Mathematics Lecture Notes 22

a. The demand function.
P Demand(Q)
6 (P1) 15 (Q1)
16 (P2) 10 (Q2)
Replacing these values into formula:

𝑄 − 15 10 − 15 𝑄 − 15 −5 −1
= → = =
𝑃−6 16 − 10 𝑃−6 10 2

2𝑄 − 30 = −𝑃 + 6
2𝑄 − 36 = −𝑃
We write tge demand function solving the equation for P:

𝑃 = −2𝑄 + 36

Sakarya Business School, Mathematics Lecture Notes 23

b. Market equilibrium price and quantity.

The supply function was given in the question. We found the demand function in the
previous question. We can find the PDN by equating these two functions.

𝑆𝑢𝑝𝑝𝑙𝑦 = 𝐷𝑒𝑚𝑎𝑛𝑑
2𝑄 + 4 = −2𝑄 + 36
4𝑄 = 32 → 𝑄 = 8
Let’s substitute 8 into supply or demand function:

𝑃 =2 8 +4
𝑃 = $20
$20 is the market equilibrium price

Sakarya Business School, Mathematics Lecture Notes 24

Exercises
1) Demand function of a product is 𝑃 𝑄 + 4 = 400 and the supply function is
2𝑃 − 𝑄 = 38. Find the market equilibrium point.
2) Market equilibrium price of a product is $8 and the Market equilibrium quantity
is 12,000. ıf price decreases to $2, manufacturer produces any product. If price
increased to $20, customers buy any product. Find the supply and demand
functions.
3) At a price of $5,50 per bushel, the annual US supply and demand for corn are 2,4
and 2,9 million bushels, respectively. When the price rises to $7,30, the supply
increases to 2,8 million bushels while the demand decreases to 2,4 million bushels.
Find the supply and demand equations and find the equilibrium point for the US
soybean market.

Sakarya Business School, Mathematics Lecture Notes 25

4) The supply and demand functions of a product are 𝑃 = 𝑄2 − 20𝑄 + 200 and
𝑃 = −40𝑄 + 1000, respectively. Calculate the MEP and draw the graph.

Sakarya Business School, Mathematics Lecture Notes 26

Questions, Comments, Suggestions?

Supply… Demand…!
sguner@sakarya.edu.tr
Sakarya Business School, Mathematics Lecture Notes 27