Slide 1

Numericals- Supply and Demand AnalysisPrinciples of EconomicsSection 2Sudatta BanerjeeEquation of a straight line: Y= a + bXEquation of demand curve: Qd = a + bP (P= price)So, Qd= b P Thus, b= Qd/ PEquation of supply curve: Qs = c + dP So, Qs= d P Thus, d= Qs/ P

21. The weekly demand schedule for milk in Hyderabad:

Calculate the weekly demand function.

Price (Rs/Ltr)Demand 91810161114121213101483Let equation of the demand curve be: Qd = a + bP So, Qd= b P Thus, b= Qd/ PConsider price increase from 9 to 10: P= 1; Qd= -2S0, b= -2/1 = -2 Therefore, Qd = a - 2P Putting any combination of price and quantity we get: 18= a- (2x9) => a=36The demand function is therefore: Qd= 36-2P42. Demand function: Q= 34-2P Find the theoretical maximum quantity of good demanded and theoretical maximum price of the good.5The maximum quantity that can be demanded is when the price is zeroQ= 34- 2P = 34- (2x0) = 34The theoretical maximum price is the price at which quantity demanded is zeroQ= 34- 2P 0= 34- 2P2P= 34P= 1763. The weekly demand schedule for a good in Delhi:

Calculate the weekly demand function.Answer:Q= 72- 4P

Price (Rs)Quantity demanded9361032112812241320141674. The weekly supply schedule for milk in Hyderabad:

Calculate the weekly supply function.AnswerQ=PPriceQuantity Supplied991010111112121313141485. Supply Function: Qs= 2p-100Find the price below which no milk will be supplied.

AnswerMeans Quantity supplied should be zero.Therefore, 0= 2P-100P= 50

96. Demand function: Qd= 100-3P Supply Function: Qs= 2P-20Find the equilibrium output. If price is 20, would there be surplus or deficit?10At equilibrium Qd= QsTherefore: 100- 3P= 2P- 205P= 120 P= 24When p=24, Q= 100- (3x24) => Q= 100-72= 28If price= 20,Qd= 100- (3x20)= 40Qs= (2x20)- 20 = 20Therefore, shortage= 40-20=2011Calculation of ElasticityFor calculation of elasticities:1. If the direction of price and quantity change is given, use the initial quantity and price as base Elasticity (ep): %change in quantity/ %change in priceep= (Q/Q1)x100/ (P/P1)x100ep=(Q/ P) x (P1/Q1)2. When the direction of change is not given, use the mid point formula.Elasticity (ep): %change in quantity/ %change in priceep=[Q/(Q1+Q2/2)]x100/ [P/(P1+P2/2)]x100ep=(Q/ P) x (P1+P2/Q1+Q2)

127. The demand schedule for a product:

Find the price elasticity of demand for an increase in the price from 5 to 6.

13PriceQuantity demanded3204165126874P1= 5, P2= 6; P= 1Q1= 12, Q2= 8; Q= -4ep= (Q/ P) x (P1/Q1)ep= (-4/1) x (5/12)= -1.67-1.67 0r in absolute terms 1.67- represents perfect elasticity 148. The following demand schedule is given:

Calculate the price elasticity of demand for a decrease in price from 6 to 5.Answer: -3-3 0r in absolute terms 3- represents perfect elasticity

15PriceQuantity Demanded32041651268749. The monthly schedule for rice for a family is given below:

Find the price elasticity of demand for rice.16Price (Rs./kg)Quantity demanded12211318Since direction of change is not given:ep=(Q/ P) x (P1+P2/Q1+Q2)Now, P1= 12, P2= 13, Q1= 21, Q2= 18P=1, Q=-3

ep= (-3/1) x (25/39) = -75/39 = -1.92-1.92 0r in absolute terms 1.92- represents perfect elasticity

1710. Demand function for ball point pens is Qd= 100- 0.5PFind the price elasticity of the good at price Rs. 10.

N.B. When we need to compute price elasticity of demand at a particular point (price), we use point price elasticity of demand.ep= (Q/ P) x (P/Q)18We have Qd= 100- 0.5PQ/ P= -0.5If P=10, Qd= 100- 0.5x10 = 95ep= (Q/ P) x (P/Q) = -0.5 x 10/95 = -0.052-0.052 0r in absolute terms o.o52- represents inelastic demand

19