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Market Equilibrium — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsMarket Equilibrium6 Marks
Question
Consider the following demand and supply functions for a good:
Quantity demanded = 160 - 2p
Quantity supplied = -40 + 2p
  1. Calculate the equilibrium price and quantity.
  2. Find out a price at which there is excess demand.
  3. Find out a price at which there is excess supply.
✓

Answer

  1. Quantity demanded = 160 - 2p
Quantity supplied = -40 + 2p

Equilibrium is attained at a point where market demand is equal to market supply, i.e. Quantity demanded = Quantity supplied

Hence, 160 - 2p = -40 + 2p

160 + 40 = 2p +2p

$200=4\text{p,p}=\frac{200}{4}=50$

Hence, equilibrium price =₹ 50 Equilibrium quantity will be,

Quantity demanded = Quantity supplied

= 160 - 2p = 160 - 2 × 50

= 160 - 100 = ₹ 60
  1. At any price below the equilibrium price there will be excess demand.
Let us take at price ₹ 20

p = ₹ 20 Quantity demanded = 160 - 2p

= 160 - 2 × 20 = 160 - 40

= ₹ 120 Quantity supplied = - 40 + 2p

= - 40 + 2 × 20 = -40 + 40 = 0

Quantity demanded > Quantity supplied [excess demand] Also it can be concluded that at ₹ 20 there will be no supply of the commodity, hence between 20 < p < 50, there will be excess demand.
  1. At any price above equilibrium, there will be excess supply.
Let us take at price ₹ 80

Quantity demanded = 160 - 2p

= 160 - 2 × 80 = 160 - 160 = 0

Quantity supplied = -40 + 2p

= -40 + 2 × 80 = -40 + 160 = 120

Quantity demanded < Quantity supplied [excess supply]

Also, it can be concluded that at p = ₹ 80 demand will be zero, hence there will be excess supply between 50 < p < 80.

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