Question

The market demand curve for commodity X is qD = 700-p. Now, let us allow for firms producing commodity X. Also assume the market consists of producing commodity X. Let the supply curve if a single firm be explained as:
qSf = 8+3p for p>20
= 0 for 0<p<20
a. What is the significance of p
Calculate the equilibrium quantity and number of firms at the equilibrium price of 20.

Answer 1

a. P= 20 indicates that the minimum average cost of the firm is 20 and the firm will not supply or produce commodity X for any price less than 20.

Determination of equilibrium quantity- It can be determined by putting the value of equilibrium price of 20 in the market demand curve.

Qd = 700 -20 = 680 units

The number of firms can be determined by dividing the equilibrium quantity by quantity supplied. Quantity supplied by a single firm can be calculated by putting the value of equilibrium price of 20 in the supply curve.

qSf = 8+3*20 = 68 units

Number of firms= 680/68 = 10 firms