Answer to Question #82450 in Microeconomics for Sharifah

Question

a) Define equilibrium price and equilibrium quantity with a suitable diagram.


b) The demand function for ice cream cones is P = 800 - 2Q, and the supply function of ice cream cones is P = 200 + 1Q.

The price of a cone is expressed in cents, and the quantities are expressed in cones per day.

i) Determine the equilibrium price and quantity.

ii) Draw the curve and show the equilibrium price and quantity according to answer in (i).

iii) What will happen in the market when the market price is lower than the
equilibrium price? Explain.

Answer 1

a) Equilibrium price and equilibrium quantity is the point, at which quantity demanded equals quantity supplied without any shortage or surplus.

b) The demand is P = 800 - 2Q, and the supply is P = 200 + 1Q.

i) The equilibrium price and quantity are:

800 - 2Q = 200 + Q,

3Q = 600,

Q = 200 units,

P = 200 + 200 = $400.

ii) The equilibrium price and quantity according to answer in (i) is a point where demand and supply curve intersect.

iii) When the market price is lower than the

equilibrium price, the quantity demanded will be higher than the quantity supplied, so there will be shortage.