Question

1 Demand and Supply - Market Equilibrium ​

Suppose the demand and supply of meals in the Free Spech Cafe in Berkeley is given by Q^D =50−2p and Q^S =2p−10. ​

1. Calculate the market equilibrium, i.e. price and the number of lunches consumed.

2. Draw this scenario in a graph clearly labelled.

3. What is the consumer surplus?

Answer 1

(1) In equilibrium, QD = QS

50 - 2p = 2p - 10

4p = 60

p = 15

Q = 50 - (2 x 15) = 50 - 30 = 20

(2)

From demand function,

When QD = 0, p = 50/2 = 25 (Vertical intercept) & When p = 0, QD = 50 (Horizontal intercept)

From supply function,

When QS = 0, p = 10/2 = 5 (Vertical intercept)

In following graph, AB & CD are demand & supply curves with above intercepts, intersecting at point E with price P0 (= 15) and quantity Q0 (= 20).

(3) Consumer surplus (CS) = Area between demand curve & market price = Area AEP0

= (1/2) x (25 - 15) x 20 = 10 x 10

= 100