Unit 2

Analysis of demand supply and market efficiency

1. the following demand function are the demand function of
individual A, B , C. find out the market demand function .
QA=10-3PX QB= 24-5PX QC=20-4PX
Solution,
Given
demand function of individual A,Band C are
QA=10-3PX QB= 24-5PX QC=20-4PX
Making demand function
QM= QA+QB+QC
=10-3PX+24-5PX+20-4PX

= 54-12PX Hence the market demand function is equal to 54-12Px

2. Derive demand function from the following demand schedule .
Px 40 30 20 10 0
Qx 0 100 200 300 400
Solution
According to the question
Autonomous demand (a) =400
Slope of demand curve (b)= -(DeltaQ/DeltaP) = -(100/-10)= 10
Now, we know that,
Demand function Qx=a-bPx
Therefore, Qx= 400-10Px
4. Let autonomous supply 20 and slope of the supply curve is 4 derive the linear supply function
Solution
Given ,
Autonomous supply (a) =20
Slope of the supply curve (b)=4
We know that
Supply function Qx=a+bPx
= 20+ 4Px
6. Determine the equilibrium price and quantity from the following demand and supply
function.
Qd=10-4P Qs= -2+8P
Solution, given
Demand function Qd=10-4P
Supply function Qs=-2+8P
For equilibrium
Qd=Qs
10-4P= -2+8P
-12P= -12
P=1
Putting value of P in demand equaltions or supply equations we get, equilibrium quantity
Qd= 10-4P=10-4*1=6
Qs= -2+8P= -2+8*1 =6
Hence, equilibrium price is Rs 1 and equilibrium quantity is 6.
Long problem

1. Derive the demand schedule from the following function and on the same graph plot the
demand schedule. Also explain with reasons whether it is increase in demand or increase in
quantity demanded
Qd=60-10P
Qd’=80-10P
Solution,
Given,
Putting values of price (p)from in demand function , we can derive demand schedule
Qd (original) Qd(new)
0 60 80
1 50 70
2 40 60
3 30 50
4 20 40
5 10 30
2.Consider the following demand and supply function
Qd=300-5P
Qs=-100+20P
a. Find equilibrium price.
b. Draw demand and supply curve and also show equilibrium.
c. Calculate consumer surplus producer surplus and total surplus.
Solution,
Given
For equilibrium price
Qd=Qs
300-5P= -100+5P
P= 16
Putting the value of p in the demand and supply function we get
Qd=300-5P Qs=-100+20P
Qd= 220 units Qs=220units
Hence equilibrium price Rs16 and equilibrium quantity is 220 units
b. In order to draw demand and supply curve we have to find out prices that make demand and supply
zero then
When Qd=0 When Qs=0
300-5P=0 -100+20P=0
P=Rs60 P=Rs 5
c. consumer surplus = Area of BEC
=1/2* BC*CE
producer surplus = Area of AEC
= ½ * AC*CE
=
Part B elasticity of demand and supply
1. The demand function for a commodity is Q=100-5P. Find out elasticity at price Rs 10
Solution
Given,
price (p)=Rs 10
Quantity demand(Q)= 100-5P= 100-5*10=100-50=50
We know that,
Now , point elasticity (Ep)= ×

=-5*
= -1
since, Ep= -1

Working note
Q=100-5P
Differentiating the equation w.r.t P

-
=0-5 = -5
3. Find out the marginal revenue when average revenue is Rs 60 and price elasticity of demand is 3.
Solution
given.,
Average revenue(AV)=60
Price elasticity of demand(Ep)= 3
We know that,
MR=AR()
=60(3-1/3)
=40
Hence MR=Rs 40
4. Derive price when Ep=0.5 and MR=20
Solution
Given,
Ep=0.5
MR=-20
We know,
P= MR(()
= -20 () = Rs 20 = hence price = 20
5. Compute price elasticity of demand when AR=10 and MR = 5
Solution
We know that,
Ep=
=
=2
Hence, price elasticity of demand is 2
Long questions
1. Calculate the price elasticity of demand by proportionate and arc method when price decreases
from Rs 20 to Rs 10 in the following example.
Price 20 10
Demand 40 80

Solution ,
Proportionate method Arc method
Initial price (p)= 20 Ep= ×
Initial quantity(Q)= 40 =×
New price (P1)= 10 =-1
New quantity (Q1)= 80
dP= -10
dq=40
Ep= ×
=×
= -2
2. What is the price elasticity of demand for (a) business travelers and (b) vacationers ( use arc
method)
Solution,
business travellers Business vacationers
Initial price (P1) = 20,000 Initial price (P1) = 20,000
New price (P2)= 25,000 new price (P2)= 25,000
Initial Quantity (Q1)=20 initial quantity Q1=8
New quantity(Q2)= 19 New quantity Q2= 6
Now, now,
Arc elasticity (Ep)= × Arc elasticity (Ep)=×
= × Ep=×
= - 0.23 = -1.28
4.From the following table calculate income elasticity of demand for commodity X when income rises from
Rs10,000 to 15,000 and determine what type of good is commodity X.
Q 100 250
Y 10,000 15,000
Solution,
Here,
Initial demand (Qx)=100
New demand (Qx1)=250
Change in demand (dQx)=new demand – initial demand = 250-100 =150 units
Initial income (Y)=Rs 10,000
New income (Y1)= Rs 15,000
Change in income (dY)= new income – initial income = 15,000-10,000=Rs 5000
We know that,
Ey= ×
=×
=3
Ey is positive and greater than 1, so the commodity is luxury.
6. Calculate the following table and find out cross elasticity of demand .
Demand for good X 10 8
Price of good Y 5,000 8,000
9. In 2021 1,00,000 units of bread were sold at Rs 30 per unit in bhatbhateni super store. The price elasticity of demand for bread is -
0.2 The bhatbhateni superstore has decided to increase price of breads Rs40 per unit for 2022.
a. What will be the effect on total sales of bread in 2022?
b. Compute total revenue of bread for 2021?
c. Compute total revenue of bread for 2022.
d. Suppose you are appointed as a consultant of bhatbhateni superstore at marketing department . What suggestion would you
provide to the managing director of the superstore about this pricing decision?
Solution,
Initial quantity of bread( Q)= 10,00000
Initial price (P)= Rs 30
Price elasticity of demand Ep= -0.2
New price of bread (P1)=40
e. New quanitiy (Q1)= ?
dQ= Q1-Q = Q1-10,00,000
dP=P1-P =40-30 =10
Now.
Ep=×
-0.2= ×
-66,666.66= Q1-10,00,000
Q1=933,333.34
b. Total revenue of bread for 2021=P*Q=30*10,00,000 =Rs30,000000
c. Total revenue of bread for 2022= P1*Q1=
d. If I was appointed as a consultant of the bhatbhateni supermarket. I
would give suggestion to rise the price of bread because it has
relatively inelastic demand.
 Points A B C D E
10. Consider the following table
Px 8 6 4 2 0
Qsx 50 40 30 20 10
Qdx 0 15 30 45 60
a. Derive linear demand and supply functions.
b. Graph Qsx and determine equilibrium price and quantity.
c. Compute price elasticity of supply at movement from B and D to B by (i) percentagr method (ii) arc method.
Which methods is more appropriate and why?
Solution,
d. For demand function,
At price 0
Qdx=60
Therefore a= 60
b= = = = -7.5
Hence demand function
Qdx=a+bPx
= 60+(-7.5)Px
= 60-7.5Px
For supply function
At price 0
Qsx= 10
a=10
b== = = 5
Supply function Qsx= a+bPx Qsx = 10+5Px
b. Graph
• C. i. percentage method
Price elasticity of supply from B to D
Es= = = 0.75
Price elasticity of supply from D to B
• Ii. Arc method
Price elasticity of supply from B to D
Es=
=
=
=0.666