# Market Eqaulibrium

Topics: Supply and demand, Economic equilibrium, Demand curve Pages: 9 (1709 words) Published: September 4, 2011
. Eye-de-ho Potatoes is a product of the Coeur d=Alene Growers= Association. Producers in the area are able to switch back and forth between potato and wheat production depending on market conditions. Similarly, consumers tend to regard potatoes and wheat (bread and bakery products) as substitutes. As a result, the demand and supply of Eye-de-ho Potatoes are highly sensitive to changes in both potato and wheat prices. Demand and supply functions for Eye-de-ho Potatoes are as follows:

QD=-1,450 - 25P + 12.5PW + 0.2Y,(Demand)

QS=-100 + 75P - 25PW - 12.5PL + 10R,(Supply)

where P is the average wholesale price of Eye-de-ho Potatoes (\$ per bushel), PW is the average wholesale price of wheat (\$ per bushel), Y is income (GNP in \$ billions), PL is the average price of unskilled labor (\$ per hour), and R is the average annual rainfall (in inches). Both QD and QS are in millions of bushels of potatoes.

A.When quantity is expressed as a function of price, what are the Eye de ho Potatoes demand and supply curves if PW = \$4, Y = \$7,500 billion, PL = \$8, and R = 20 inches?

B.Calculate the surplus or shortage of Eye-de-ho Potatoes when P = \$1.50, \$2, and \$2.50.

C.Calculate the market equilibrium price/output combination.

P3.1SOLUTION

A.When quantity is expressed as a function of price, the demand curve for Eye de ho Potatoes is:

QD=-1,450 - 25P + 12.5PW + 0.2Y

=-1,450 - 25P + 12.5(\$4) + 0.2(\$7,500)

QD=100 - 25P
When quantity is expressed as a function of price, the supply curve for Eye de ho Potatoes is:

QS=-100 + 75P - 25PW - 12.5PL + 10R

=-100 + 75P - 25(\$4) - 12.5(\$8) + 10(20)

QS=-100 + 75P

B.The surplus or shortage can be calculated at each price level:

Price

Quantity
Supplied

Quantity
Demanded

Surplus (+) or
Shortage (-)

(1)
(2)
(3)
(4) = (2) - (3)

\$1.50:
QS = -100 + 75(\$1.50)
= 12.5
QD = 100 - 25(\$1.50)
= 62.5
-50

\$2.00:
QS = -100 + 75(\$2)
= 50
QD = 100 - 25(\$2)
= 50
0

\$2.50:
QS = -100 + 75(\$2.50)
= 87.5
QD = 100 - 25(\$2.50)
= 37.5
+50

C.The equilibrium price is found by setting the quantity demanded equal to the quantity supplied and solving for P:

QD=QS

100 - 25P=-100 + 75P

100P=200

P=\$2

To solve for Q, set:

Demand: QD = 100 - 25(\$2)=50 (million bushels)

Supply: QS = -100 + 75(\$2)=50 (million bushels)

In equilibrium QD = QS=50 (million bushels).

P3.2 Demand and Supply Curves. Demand and supply conditions in the market for unskilled labor are important concerns to business and government decision makers. Consider the case of a federally mandated minimum wage set above the equilibrium, or market clearing, wage level. Some of the following factors have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the supply or quantity supplied may also result. Holding all else equal, describe these influences as increasing or decreasing, and indicate the direction of the resulting movement along or shift in the relevant curve(s).

A.An increase in the quality of secondary education.

B.A rise in welfare benefits.

C.An increase in the popularity of self-service gas stations, car washes, and so on.

D.A fall in interest rates.

E.An increase in the minimum wage.

P3.2SOLUTION

A.An increase in the quality of secondary education has the effect of increasing worker productivity and will cause an increase or rightward shift in the demand for unskilled labor. To the extent that the benefits of an increase in the quality of education are recognized by students, more will stay in school and a secondary effect of a decrease or leftward shift in the supply of unskilled labor will also be observed. This shift will be reinforced as workers Agraduate@ from the unskilled to the skilled segment of the labor force.

B.A rise in welfare benefits makes not working more attractive and will cause...