Economics

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

Economics

Postby rishabhhurkat » Thu Dec 31, 2015 4:18 am

Please explain me the following:

"QD=1000-90P"

"QS=-600+80P"

What is this '1000' and '-600' in the above equation
How to Interpret and Read it.

Please provide me with a detailed explanation and if possible a graph

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Economics

Postby edupristine » Thu Dec 31, 2015 7:47 am

Please send the complete question and the source of the question.

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

Re: Economics

Postby rishabhhurkat » Fri Jan 01, 2016 4:52 am

The demand function for a good is QD =1000 − 12P and its supply function is QS = −600 + 90P. At a price of $20, the market for this good exhibits:
A.an equilibrium
B.excess demand
C.excess supply


Answer : C
At P = $20, QD =1000 − 12(20) = 760 and QS = −600 + 90(20) =1200. Quantity demanded is lower than quantity supplied at this price, so the market exhibits excess supply

I got how to get the answer even the concept is clear...but how to interpret the above equation is the matter of problem..
Please help me over that

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

Re: Economics

Postby rishabhhurkat » Fri Jan 01, 2016 2:56 pm

The demand function for a good is QD =1000 − 12P and its supply function is QS = −600 + 90P. At a price of $20, the market for this good exhibits:
A.an equilibrium
B.excess demand
C.excess supply


Answer : C
At P = $20, QD =1000 − 12(20) = 760 and QS = −600 + 90(20) =1200. Quantity demanded is lower than quantity supplied at this price, so the market exhibits excess supply

I got how to get the answer even the concept is clear...but how to interpret the above equation is the matter of problem..
Please help me over that

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Economics

Postby edupristine » Wed Jan 06, 2016 7:28 am

I really appreciate the explanation you sought. I think the following shall help you:
The equation of demand curve relates quantity to price, assuming other factors remaining constant. It is of the form (linear) Q= a-bP. Here a=1000, It indicates what shall be the quantity demanded when price equals 0 i.e. what will people demand even when it is available free. Obviously, this is true indeed. Consider a market constituting your family alone. Even if something Say Pizza/Burger is made free of cost, there shall be the maximum amount that you shall demand in a given period of time which is given by value a.

Similarly supply curve equation is of the form Q= a+bP. In most of the equations that you see a will be positive which implies quantity that seller is willing to sell when price is 0, which however will not be realistic. But it accounts for factors other than price that affects quantity supplied. It however should be negative as in the given case it is, simply denoting the fact that there will be a minimum price below which seller would not be willing to sell any quantity of the product.

rishabhhurkat
Good Student
Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

Re: Economics

Postby rishabhhurkat » Fri Jan 08, 2016 1:21 pm

ok...so i can conclude that when "Q=a+bP" a is the maximum qty. that a person will demand...

if so,
then why it is added???

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Economics

Postby edupristine » Sat Jan 16, 2016 7:55 am

The equation Q=a+bP stands for Supply curve: This indicates that as price rises, quantity supplied will also rise.
However, the equation for demand curve is given by Q= a-bP, b here is positive no. : This indicates that as price shall increase, quantity demanded will fall. As ‘a’ indicates the maximum qty that will be demanded, it shall be demanded only when price is equal to zero. (Put p = 0 in above equation). Now as price increases, we need to subtract from this maximum qty, the effect of increase in price on quantity demanded.
I hope it helps.


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