Question

This problem involves solving demand and supply equations to determine equilibrium Price and Quantity and then illustrating them graphically.

Consider a demand curve of the form : QD= -3P + 45 where QD is the quantity demanded and P is the price of the good.

The supply curve for the same good is: QS= P-5 where QS is the quantity supplied at price, P. Solve for equilibrium Price (P*) and Quantity (Q*). Please set up the problem and underline your answers below. On the graph below, illustrate and label demand, supply, P* and Q* c. What is the slope of the supply curve? d. What is the slope of the demand curve? e. Calculate consumer surplus, producer surplus and total surplus

Answer 1

Equilibrium occurs at demand=supply. As in demand-supply graph, price is in vertical axis and quantity in horizontal axis so we set the equations as y=a+bx where y=price and x=quantity. Consumer surplus refers to the area below the demand curve and above the equilibrium price. Producer surplus is the area above the supply curve and below the equilibrium price. The calculation is done below.