Supplemental Problem for Class #2

Let’s assume that demand for a product is linear and can be described by the function
P = 50-0.2Q
If total costs are 1,125, what are profits if
a) We can only charge one price and P = 25
b) If can charge three prices, P = 40, P = 25 and P = 10

Solution: Part a
P = 50-0.2Q; Q = 250-5P
When P = 25, Q = 125. TR = 125*25 = 3,125
TC= 1,125
Profits = 3,125-1,125 = 2,000
 Supplemental Problem for Class #2

Solution: Part b
Q = 250-5P
When P = 40, Q = 250-5*40 = 250-200 = 50
So, we know 50 units will be sold at P = 40

Now when P = 25, we know that total demand is 125.

However, 50 seats are being sold at P = 40
So, an additional 75 seats will be sold at P = 25.

Likewise, when P = 10, total demand is 200.

However, you have already sold 125 units at higher prices. So total units sold at P = 10 will be
200-125 = 75.
TR = 50*40+75*25+75*10 = 2000+2125+750 = 4,625
Profits = 4625-1,125 = 3,500.
 Shift in Demand and Supply Functions
Let’s create a new market, tutoring fellow students at IITBHU. Let’s pretend that the institute has
created a platform where students (typically first years) can sign up for tutoring and senior
students are willing to provide this service for a fee.

Luckily, for us, both demand and supply functions are linear.

We know that for a price of 100 per session, 20 students are willing to teach.
For a price of 200 per session, 40 students are willing to teach

We know at if tutoring is offered for free, 180 students would be willing to avail of tutoring
services. However, at a price of 200, only 100 students would be willing to pay that fee for
tutoring.

Let’s also assume that the quality of services is exactly the same!
 Shift in Demand and Supply Functions
First, let’s determine the linear functions and, like all good economists, draw a graph!
Supply function is Qs = 0.2P. Demand function is Qd = 180-0.4P

Price Demand Supply

0 180 0
50 160 10
100 140 20
150 120 30
200 100 40
250 80 50
300 60 60
350 40 70
400 20 80
Shift in Demand and Supply Functions
 Shift in Demand and Supply Functions
What if the institute decided that it would create an incentive by offering tutors an additional
150 per session, in addition to what students pay.
This would change the supply function to Q = 30+0.2P

Student Demand OLD NEW

Price Supply Supply

0 180 0 30
50 160 10 40
100 140 20 50
150 120 30 60
200 100 40 70
250 80 50 80
300 60 60 90
350 40 70 100
400 20 80 110
Shift in Demand and Supply Functions
What is the NEW equilibrium?

Q = 180 – 0.4 P (demand)

Q = 30 + 0.2 P (Supply)
At equilibrium, Qs = Qd => P = 250, Qs = Qd = 80
Shift in Supply
 Shift in Demand
Let’s instead assume that tutoring services have been very effective and that for the same price
points, more students are willing to use these sessions.
Also assume the new demand function is Qd = 210-0.4P The supply function is still Qs = 0.2P.
 Shift in Demand and Supply Functions
Let’s instead assume that tutoring services have been very effective and that for the same price
points, more students are willing to use these sessions.
Also assume the new demand function is Qd = 210-0.4P The supply function is still Qs = 0.2P.

Student OLD NEW OLD

Price Demand Demand Supply

0 180 210 0
50 160 190 10
100 140 170 20

150 120 150 30

200 100 130 40

250 80 110 50

300 60 90 60

350 40 70 70

400 20 50 80
Shift in Demand Function
 Various Scenarios

• In each of the following scenarios, determine if there will be a short-term

shift in the demand function or the supply function. Then decide if the
price will increase or fall and if equilibrium quantity will increase or
decrease

1) IIT Bhu provides luxurious rooms for the tutoring to be held, including
free tea and samosas (for students AND tutors) ☺
2) A wealthy alum starts her own tutoring service and offers it for free.
3) The institute now provides easy to follow lecture notes that makes it
easier to understand class material.
4) In an effort to improve quality, the institute makes the course more
difficult.
 Extra Credit Assignment
There are many buses, trains and taxis that take passengers between the cities of Mumbai and
Pune. There is currently an equilibrium point where market demand for busses is equal to
market supply of busses.
In each of the following scenarios, determine if there will be a temporary (short-term) shift in the
demand function or the supply function (or both) for BUSSES. Mention if the shift will be to the
RIGHT or to the LEFT. Then decide if the price will increase or fall and if equilibrium quantity will
increase or decrease. You’re welcome to provide a brief explanation, but not necessary.

1. Uber and other taxi services are offering a discount.

2. The cost of petrol has increased by 20%
3. A very popular music festival is being held in Pune.
4. Pune is going through a health scare.
5. Chicago, USA is experiencing a severe winter storm.