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Suppose the market for corn is given by the following equations for supply and demand:
QS = 2p − 2
QD = 13 − p
where Q is the quantity in millions of bushels per year and p is the price.
Setting QD = QS,
13 - p = 2p - 2
3p = 15
p = 5
Q = 13 - 5 = 8
Elasticity of demand = (dQD / dp) x (p / QD) = - 1 x (5/8) = - 0.625
Elasticity of supply = (dQS / dp) x (p / QS) = 2 x (5/8) = 1.25
From demand: When QD = 0, p = 13 and when p = 0, QD = 13.
From supply: When QS = 0, p = 2/2 = 1.
In following graph, D0 and S0 are demand and supply curves, intersecting at point E with equilibrium price P0 (= 5) and quantity Q0 (= 8).
When p = 7,
QD = 13 - 7 = 6
QS = 2 x 7 - 2 = 12
Since QD < QS, there is a surplus equal to (QS - QD) = 12 - 6 = 6.
In the graph, at price of P1 (= 7), quantity demanded is lower at QD and quantity supplied is higher at QS, causing surplus of (QS - QD).
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