Assume the current price of good X is too high (it is above the equilibrium pric

Question

Assume the current price of good X is too high (it is above the equilibrium price). In your own words, describe the equilibrating process that would take place in this market. Problem 8. 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?

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.

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