Question

Suppose the demand and supply functions of wheat are given by Q_D = 800 – 4P and Q_S = 600 + 4P respectively. 

(i) Find the equilibrium price and quantity demanded.

(ii) Due to a shortage of fertilizers, the cost of production of wheat is increased. So that the new supply function is

Q_s = 400 + 4P.

What will happen to the equilibrium price and quantity demanded?

Answer 1

(i) q₀ = 800 - 4p

q_s = 600 + 4p

At equilibrium q₀ = q_s

800 - 4p = 600 + 4p

8p = 200

p = \(\frac{200}{8}\)

= 25

q,s = 600 + 4p

q_s = 600 + 100

= 700

Equilibrium price = 25

Equilibrium quantity = 700

(ii) New supply curve is q_s = 400 + 4p

At  equilibrium q₀ = q_s

800 - 4p = 400 + 4p

8p = 400

P = \(\frac{400}{8}\)

= 50

q_s = 400 + 4p

= 400 + 200

= 600

The equilibrium price will increase and equilibrium quantity will fall.