Skip to main content

Finding the market equilibrium price and quantity

Finding the equilibrium price and quantity is perhaps one of the most common problems in an introduction to Microeconomics course, which is exactly what we are going to do in this post!

Consider the following problem, you are tasked with finding the equilibrium price and quantity for a particular good X. 

You are told that the producers are willing and able to sell 2 units for the  price of 16 U.S dollars a unit, and if the price increases, they are able to make 10 units for a price of 20 U.S dollars per unit. Assuming that the supply curve is linear, then it can be modeled by the following equation:

 
The same process can be used to determine the market demand (assuming linearity and that we are given information about the market demand schedule). At a price of 30 U.S dollars consumers are willing to buy 10 units, if the price decreases to 12 U.S dollars, consumers want to buy 20 units. Thus the demand curve corresponds to this equation:

Finally, all we need to do is to set both equations equal to one another and solve for P. Remember, the equilibrium price and quantity are determined by the intersection of the demand and supply curves (note that in the equation below P=Pe).
Now that we have the equilibrium price, we can plug this result in any of our two previous equations representing the market demand and supply curves and solve for Q. They should both  give the quantity demanded when the market is in equilibrium. This is also a nice way to double check your work (i.e if you get two totally different results you probably made a mistake somewhere).

 
Let's visualize that:
In a more realistic fashion, we would say that the market clearing price is 20.91 U.S dollars and the quantity of goods provided is 12 units. It would not make much sense to buy 11 units plus 82% of one good, so we can round that number to 12.

Source: example inspired from Zeder,Raphael.How to Calculate the Equilibrium Price. Quickonomics (2018). 
Labels:

Comments

Post a Comment

Popular posts from this blog

Macroeconomics: multiplier and crowding out effects

Multiplier effect: whenever   any of the components of AD increases, the increase in GDP will be greater than the initial increase in expenditures. The impact on GDP of a particular increase in spending depends on the proportion of the new income that is taken out of the system to the proportion that continues to circulate in the economy. The multiplier effect tells us the impact a particular change in one the components of AD will have on the total income (GDP).  Let k denote the spending multiplier, which is a function of MPC and MPS. The larger the marginal propensity to consume, the larger the spending multiplier. Notice that the larger the MPC, the greater the impact a particular change in the spending variables will have on the nation's GDP. The crowding out effect: If government spending increases without an increase in taxes, the government must borrow funds from the private sector to finance its deficit, thereby increasing the interest rate. This increase in interest ...
Post a Comment
Read more

Microeconomics: Factor Markets

Definition: Factor markets: markets for the factors of production (example: labor and capital). Markets are formed whenever consumers and producers meet to exchange goods or services. Deriving factor demand: the demand for goods or services in the product markets creates demand for the factors of production.  An increase (decrease) in demand for good X leads the suppliers to increase their production thereby increasing (decreasing) the demand for the factors of production.   Marginal revenue product: The demand for the factor of production is formed by multiplying a firm's marginal revenue by its marginal product.  Remember that by taking the derivative of the TR function with respect to Q we are able to find the MR. Marginal product on the other hand is found by taking the derivative of the production function with respect to a factor of production (L or K for example). Marginal revenue product (MRP): the change in total revenue when one more input is employed. It decrea...
Post a Comment
Read more

A short interlude...

Hello all, it's been quite some time since I have made any major announcements since the creation of this blog about a year and a half ago. I am currently in graduate school and will soon take a portion of my comprehensive examination (i.e exams in Micro, Macro, and Metrics that will allow me to continue my studies in my graduate program), wish me luck! Thus, I will not be able to post consistently until at least mid-June. The roadmap is as such, if I pass, I will start introductory lessons in Econometrics and Statistics (if not, then I'll have to study until I can retake the comps in August). I hope that once I am done, I will be able to add more advance materials to the blog, such as general equilibrium, indirect utility functions, and game theory/mechanism design for Micro. The Solow, Ramsey, RBC, New Keynesian models, permanent income hypothesis (PIH) and more for Macro. By the way I think I still need to add notes on the IS-LM curves, so I will do that before jumping to t...
Post a Comment
Read more