9. The following simple model is intended to represent the dynamics of supply an

Question

9. The following simple model is intended to represent the dynamics of supply and demand. Let P denote the selling price of a certain product and Q roduct being produced. The supply curve Q fP) ow much should be produced at a given price to maximize profit. and curve P g() tells what price buyers should pay givena the quantity of this p ain level of production in order to maximize their utility. the form ect a specific product and make an educated guess as to (b) supply curve Q f(P) and the demand curve P-g(Q). ults of part (a) to determine the equilibrium levels o P and Q

Explanation / Answer

Answer (a) Let the specific product be a book.

The supply curve of book is

Qs= 5 + 3 P

Here Qs is the quantity supplied of the book and P is the Price. Plus sign shows that supply curve is upward sloping which means quantity supplied of book increases with increase in price.

The demand curve of the book is

Qd = 25 - P

Here Qd shows the quantity demanded of the book and P is the price. the negative sign shows that demand curve is downward sloping. This means quantity demanded of book decreases with increase in price.

Answer (b) Equilibrium will take place where quantity demanded of book is equal to quantity supplied of book i.e. Qs= Qd

5+3P = 25 - P

This implies 4 P = 20

P = 5

Putting the value of P in Qs we get value of equilibrium quantity.

Qs = 5+ 3P

Qs = 5+3 (5)

Qs = 20

So at equilibrium Price of book = 5 and quantity of book = 20

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