The generalized demand and supply functions for good X are Qxd = 100 – 2PX + 0.0

Question

The generalized demand and supply functions for good X are Qxd = 100 – 2PX + 0.01M + 8 PY - 4Pz Qxs = 50 + 3PX – 6PI + PT Where Qxd = quantity demanded of good X Px = price of good X M = consumer income PY = price of good Y Pz= price of good Z Qxs = quantity supplied of good X Px = price of good X PI = price of input I PT = price of technology T a. Does the Law of Demand hold in this demand equation? How do you know? b. Does the Law of Supply hold in this supply equation? How do you know? c. Are good X and good Y substitutes or complements? How do you know? d. Are good X and good Z substitutes or complements? How do you know?

Explanation / Answer

a) Law of demand states that as price of a good increases, its demand decreases and vice versa, other things being constant.

If we analyse the demand function, we will observe that as the sign of Px is negative it implies with an increase in price, quantity wil decline and vice versa. Hence the law of demand hold in this equation.

b) Law of supply states that as price of a good increases, its supply alo increases and vice versa, other things being constant.

If we analyse the supply function, we will observe that as the sign of Px is pogative it implies with an increase in price, quantity supply will incerase and vice versa. Hence the law of supply hold in this equation.

c) Good x and Good y are substitute in nature. Substitute goods are those goods where if price of a good increases, consumers substitute the good for other one and hence he demand for the other increases. Here Py has postive sign that implies that with increase in price of y , quantity demanded of x will increase. Thus goods are substitue in nature.

d) Good x and good z are complimentary in nature. Complimentary goods are those goods which are consumed together such as ink and pen. where if price of a good increases, consumers reduces the demand of the good and also reduces demand of other one . Here Pz has negative sign that implies that with increase in price of z , quantity demanded of x will decrease. Thus goods are complimentary in nature.

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