Market Equilibrium

Paper 3 Linear Equations

Learning Outcomes
● Calculate the equilibrium price & quantity
from linear demand/supply functions.
● Plot demand/supply curves from linear
functions identifying the equilibrium price &
quantity.
● State the quantity of excess demand/supply
Given:
Qd = 600 - 50P
Qs = -200 + 150P
1. Calculate the Equilibrium Price & Quantity.
2. Assume the price of coffee beans increases thus affecting (supply or
demand) by 200.
a. Calculate the new schedule and plot the new curve.
b. At $4 there is disequilibrium in the market. Calculate the excess
demand/supply.
c. Calculate the new equilibrium price & quantity.
Equilibrium Price & Quantity
Equilibrium Price
Set the functions equal to
each other and solve for P
Qd = Qs
600 - 50P = -200 + 150P
800 = 200P
P = $4
Equilibrium Quantity
● Plug equilibrium price $4
back into a function and
solve for Qd or Qs.
● Both functions should
result in the same result.
Qd = 600 - 50P
Qd = 600 - 50(4)
Qd = 600 - 200
Qd = 400
Qs = -200 + 150P
Qs = -200 + 150(4)
Qs = -200 + 600
Qs = 400
At a Price of $4 and Quantity of 400 units the market is
said to be in equilibrium as Qs = Qd.
Shift in Supply
The supply curve will
shift left in response
to the increase in the
cost of coffee beans
which is a non-price
determinant of
supply, increase
factors of production.
Qs = -200 + 150P
A decrease of 200 units will decrease our “c” variable.
Qs = -400 + 150P
There will exist excess demand in the market. Qd >
Qs at $4. This is calculated by calculating the Qs at
the original market price of $4 and subtracting from
the Qd (400).
Qs = -400 + 150(4) Qd at a price of $4 is 400
Qs = -400 + 600
Qs = 200
Qd - Qs = excess demand
400 - 200 = 200

Excess Demand in the market at P = 4 is 200

New Price & Quantity Equilibrium
The new equilibrium
Price and Quantity
after the increase in
the price of coffee
beans.
P = $5
Q = 350

Qd = 600 - 50P
Qs = -400 + 150P
600-50P = -400+150P
1000 = 200P
P = $5
Qd=600-50(5) Qs=-400+150(5)
Qd=600-250 Qs=-400+750
Qd=350 Qs=350
Conclusion….
Given the functions: Qd = 600 - 50P and Qs = -200 + 150P
the Price & Quantity equilibrium was $4 and 400 units.
After an increase in the cost of coffee beans, an input in the production of
espresso, the supply decreased causing excess demand of 200 espressos at
P=$4.
The excess demand sends a signal to the market to increase prices thus
increasing the Qs and decreasing the Qd. With the increase in Price the
excess demand is corrected and the market returns to equilibrium at P=$5 and
Q = 350.