Course: Business Economics

Internal Assignment Examination

1. Akash Ltd for the year 2017 have following equations

Qd= 1200-P
Qs= 120+3P.
Find equilibrium price
Analyse what would be the excess demand or supply if price changes to Rs 400 and Rs 120.

Answer:

Law of Supply:-

The law of supply explains the relationship between price and supply of a product. According to the law,
the quantity supplied increases with a rise in the price of a product and vice versa while other factors are
constant. The other factors may include customer preferences, size of the market, size of population, etc.
For example, in the case of rise in a product’s price, sellers would prefer to increase the production of the
product to earn high profits, which would automatically lead to an increase in supply. Similarly, if the price
of the product decreases, the supplier would decrease the supply of the product in the market as he/ she
would wait for a rise in the price of the product in the future.

Supply function is the mathematical expression of law of supply. In other words, supply function quantifies
the relationship between quantity supplied and price of a product, while keeping the other factors at
constant. The law of supply expresses the nature of relationship between quantity supplied and price of a
product, while the supply function measures that relationship. The supply function can be expressed as:

Qs = f (Pa, Pb, Pc, T, Gp) Where,

Qs = Supply
Pa = Price of the good supplied
Pb = Price of other goods
Pc = Price of factor input
T = Technology
Gp = Government policy

The law of supply works on certain assumptions which are given as follows:
 Income of buyers and sellers remains unchanged.
 The commodity is measurable and available in small units.
 The tastes and preferences of buyers remain unchanged.
 The cost of all factors of production does not change over a period of time.
 The time period under consideration is short.
 The technology used remains constant.
 The producer is rational.
 Natural factors remain stable.
 Expectations of producers and the government policy do not change over a period of time.
Law of Demand:-

The law of demand represents a functional relationship between the price and quantity demanded of a
commodity or service. The law states that the quantity demanded of a commodity increases with a fall in
the price of the commodity and vice versa while other factors like consumers’ preferences, level of income,
population size, etc. are constant. Demand is a dependent variable, while price is an independent variable.
Therefore, demand is a function of price and can be expressed as follows:

D= f (P) Where D = Demand, P= Price, f = Functional Relationship

The law of demand is based on the following assumptions:

 The income of the consumer remains constant.
 Consumer tastes and preferences remain constant.
 Price of related goods remains unchanged.
 Population size remains constant.
 Consumer expectations do not change.
 Credit policies remain unchanged.
 Income distribution remains constant.
 Government policies remain unchanged.
 The commodity is a normal commodity.

Equilibrium Point:-

According to the economic theory, the price of a product in a market is determined at a point where the
forces of supply and demand meet. The point where the forces of demand and supply meet is called
Equilibrium point. Conceptually, equilibrium means state of rest. It is a stage where the balance between
two opposite functions, demand and supply, is achieved. Mathematically, market equilibrium is expressed
as:

Qd (P) = Qs (P)

Where Qd (P) is the quantity demanded at price P

Qs (P) is the quantity supplied at price P

At equilibrium price, the quantity demanded = quantity supplied to the market.

Qd=Qs

According to Question:-

Qd = 1200 -P
Qs = 120 + 3P

1200-P = 120+3P

Hence we get 4P = 1080. Hence Equilibrium price P = Rs 270

When price Rises to Rs 400

Qs=120 + (3×400)
Qs = 1320
Qd = 1200 - 400 = 800

Therefore Qs > Qd at Price P = 400

From the above price Rd = 400, we can say that there is more supply than Demand because the price
is high.

When Price rises to Rs 120

Qs = 120 + (3 × 120)

Qs = Rs 480

And

Qd = 1200 - 120 = Rs 1080

Therefore Qd > Qs at Price P = 120

The above price change implies that there is more demand than supply as the price is low.