Question

Suppose the global Soybean market is competitive and currently has the following supply and demand functions: Q_D = 700 – 0.5P_S and Q_S = P_S – 500.

The market expects to see a 25% increase in the market price within a year due to change in demand. What will be the new equilibrium price and equilibrium quantity of the market keeping all other things constant?

New P*= New Q*=

Answer 1

Answer New price = 1000 and New Quantity = 500 units

Given,

Qd = 700 -0.5P

Qs = P-500

At equilibrium quantity demanded is equal to quantity supplied.

700 -0.5P = P-500

1200 = 1.5P

P = 800

Now equilibrium price is expected to increase by 25%

Therefore new equilibrium price is equal to

P = 800 +(.25*800) = 1000

At this price

Qd = 700 -0.5P

Qd = 700 –(0.5*1000) = 200

&

Qs = P-500

Qs = 100-500 = 500

We know that at equilibrium quantity demanded is equal to quantity supplied. Thus additional 300 units are expected to be generated on demand side.