IILM

Application of Demand and Supply

Algebraic Expression of Linear Demand and
Supply Curve
• Demand: Qd=a-bP
• Supply: Qs= c+dP
a-bP = c+dP
• The intersection of the curves will be where the actual price will settle.
Suppose
• demand is governed by: Qd = 24 - 3P and
• supply by: Qs = 4 +2P
Question
• Let's try another example. Suppose the demand
and supply functions are
• Qd = -6P + 140
• Qs = 3P + 5
Solution
• Impose the equilibrium condition: Qd = Qs
• then plug in our equations: -6P + 140 = 3P + 5
• rearranging terms around: 140 - 5 = 3P + 6P
• or: 135 = 9P
• So solving for P: P = 135/9 = 15
• Equilibrium price is $15.
• What about equilibrium quantity?
• Let's use the supply curve Qs = 3P + 5,
• so plugging in our equilibrium price (15) into it: Q = 3(15) + 5
• or Q = 45 + 5
• or simply: Q = 50
• So equilibrium price is $15 and equilibrium quantity is 50 units.
Question
• Let’s see how demand and supply curves can help managers better
understand markets. You receive a summer internship with Dabur. The
group’s assignment is to determine whether Dabur should enter a new
product market. The group has to estimate future market potential and
they ask you to estimate the post-entry market price. The forecasting
group estimates the market demand curve as:
• QD = 5,230 – 350P
• If Dabur decides to enter the market,
• the estimated market supply curve is QS = 2,500 + 300P
• What is your estimate of market price?
How Real demand Equation Looks like
• Suppose the following demand relationship has been estimated for
steel handled axes
• . QA = 10,000 - 200PA + 0.1Y + 0.5A - 200PW

• Suppose that we know: Y = $15,000 A = $5,000 and PW = $10

• Estimate Demand Equation

• Substituting the known values into the demand equation yields
• QA = 10,000 - 200PA + 0.1(15,000) + 0.5(5,000) - 200(10)
• = 10,000 - 200PA + 1,500 + 2,500 - 2,000
• = 12,000 - 200PA or
• 200PA = 12,000 - QA or
• PA = 60 - (1/200)QA