supply curve describes the relationship between the
quantity supplied and the selling price. The amount of a good
or service that producers plan to sell at a given price during a
given period is called the quantity supplied. The quantity
supplied is the maximum amount that producers are willing to supply
at a given price. Quantity supplied is expressed as an amount
per unit of time. For example, if a producer plans to sell
750 units per day at $15 per unit we say that the quantity supplied
is 750 unit per day at price $15.
Similarly, the amount of a good or service that consumers plan to
buy at a given price during a given period is called the quantity
demanded. The quantity demanded is the maximum amount
that consumers can be expected to buy at a given price, and it also
is expressed as amount per unit of time.
The equilibrium price is the price at which the quantity
demanded equals the quantity supplied. The equilibrium
quantity. is the quantity bought and sold at the equilibrium
price. If the curves are graphed on the same coordinate system,
the point of intersection is the equilibrium point, and is
where supply equals demand. If the price is below equilibrium
there will be a shortage and the price will rise, while if the price
is above equilibrium there will be a surplus and the price will
fall. If the price is at equilibrium it will stay there unless
other factors enter to cause changes.
Assume that the supply
function is and the demand function is . The breakeven point is found by setting
equating the two functions and then solving the resulting equation:
This gives the first
coordinate; the second coordinate is (or, using the demand equation, )
We make the following
assumptions about supply and demand.
- The supplier will
produce 1000 units when the selling price is $20 per unit and
will produce 1500 units if the price is $25 per unit.
- Consumers will demand
1500 units when the selling price is $20 per unit but that the
demand will decrease by 10% if the price increases by 5%.
- Both supply and demand
functions are linear.
Determine the supply
function, the demand function and the equilibrium point.
To determine the supply function, we use a coordinate system and write the equation of
the line through the points (1000,20) and (1500,25).
For the demand function, one point is (1500,20). If
the price increases 5% to $21, the demand will decrease 10% to 1350.
Thus the second point is (1350,21) and we can now determine the