1. Consider a demand curve of the form QD = 40 - 2P, where QD is the quantity demanded and P is the price of the good. The supply curve takes the form of QS = -4 + 2P, where QS is the quantity supplied, and P is the price of the good. Be sure to put P on the vertical axis and Q on the horizontal axis. a. What is the equilibrium price and quantity? Draw out the supply and demand curves to illustrate this equilibrium.
1. To find the equilibrium quantity and price, we need to equate demand and supply equation-
QD = QS
=> 40 - 2P = -4 + 2P
=> 4P = 44
Therefore, equilibrium price or P* = 11
In order to find the equilibrium quantity, we will put the value of P* in either demand or supply equation.
=>Q* = 40 - 2(11)
=> Q* = 40 - 22 = 18
Thus, Q* or equilibrium quantity exchanges is 18.
The equilibrium can be graphically shown as below-
The point of equilibrium is the intersection of demand and supply curve as represented by point e above.
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