Suppose that the market demand and supply curves for widgets are given by Demand

Question

Suppose that the market demand and supply curves for widgets are given by Demand Q_D = 50 - P Supply Q_S = -10 + 2 P where Q denotes quantity and P denotes price. Calculate the market equilibrium quantity AND price. Now suppose that researchers report that widgets are good for your health. This causes an increase in demand, with the new demand curve given by Q_D = 80 - P. Calculate the market equilibrium quantity AND price. Return to the original demand curve. (That is, ignore part (b).) Now suppose that the price of oil, which is a critical input in widget production, increases. This causes a decrease in supply, with the new supply curve given by Q_S = -25 + 2P. Calculate the market equilibrium quantity AND price.

Explanation / Answer

a) For equilibrium Qd=Qs=Q 50-P=-10+2P so P=20 and Q=50-20=30

b) For equilibrium Qd=Qs=Q 80-P=-10+2P so P=30 and Q=50-30=20

c) For equilibrium Qd=Qs=Q 50-P=-25+2P so P=25 and Q=50-25=35

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