Determining Supply and Equilibrium

Equations
Supply curve equation

 The market supply curve shows the combined quantity supplied of goods at
different prices.
 the horizontal sum of all individual supply curves.
Linear Supply curve
 A linear supply curve can be plotted using a simple equation
P= a + bS
 a = plots the starting point of the supply curve on the Y-axis
intercept.
b = slope of the supply curve.
P = 30+0.5(Qs)

Inverse supply curve

This plots the same equation in terms of Qs
2(P-30)= Qs
Example of a linear supply curve
P = 30+ 0.5(QS)
Linear Supply Function
The Supply Schedule

Q P

0 30

10 35

20 40

30 45

40 50

50 55

60 70
 Determining Price and Quantity

 P= 30+.5Qs
 = 30+.5(10)
 P= 35
P= 30+.5(20)
= 30+ 10=40
P= 30+ .5Qs
.5Qs = 30-P
Qs= 30- 35/-.5
Qs = -5/-.5= 10
Shift in the slope of the
supply curve

P = 30+ 1.2(QS)
= 30+ 1.2 (40)=78
1.2Qs= 30-P
1.2Qs = 30- 78
Qs = -48/-1.2= 40
P= 30+1.2Qs

Q P

0 30

10 42

20 54

30 66

40 78

50 90
Shift in the Supply
Curve
P= 0+1.2Qs
+0+ 1.2 (40)= 48

1.2Qs= 0-48
= -48/-1.2=40
P= 30+1.2 (40)=78
Why is supply curve generally upward sloping?

 Generally, a higher price encourages firms to produce more.

 This is for two reasons.
1. A higher price makes the good more profitable to produce.
2. In the short term, the cost of production (marginal cost) is affected by
the law of diminishing marginal returns. Increasing output with capital
fixed leads to a point where marginal costs rise rapidly, so the
firm needs a higher price to compensate for the higher cost of
production.
Effect of tax on the supply curve

P = 0 +2Qs
 A specific tax will shift the supply curve upwards by P5. After tax,
the supply curve will be P = 5+2Qs

 An Indirect tax will shift the supply curve upwards by a certain

percentage. e.g. VAT = 20%

 P = 0+2Qs. After VAT will be P = 0+(2Qs * 1.2)

Effect of Direct and Indirect Taxes

 Specific Tax
P= 0+ 2Qs
= 5+2 (40)
= 5+ 80= 85
Indirect Tax (20% tax)
P= 0+2QS
P= 0+ (2Qs* 1.2)
= 0+ (80* 1.2)
P= 96
Effect of Subsidy on the supply curve

Suppose we have a supply curve

P = 30+0.5Qs =30 +.5 (40)= 50
After a subsidy of P10

P = 20+0.5Qs `= 20+.5 (40)= 40

 
Determining Demand and Supply Equilibrium Equation

A. Suppose we have two simple supply and demand equations

Qd = 20 – 2P
Qs = -10 + 2P

rice
Qd =Qs
20-2P = -10 + 2P
20+10 = 4P
30/4. = P
P = 7.50
To find Q, we just put this value of P into one of the equations

Qd = 20 – (2×7.50)
Q= 5
Qs =-10 +2 P
= -10+2(7.5)
-10+15= 5
The Graph showing the Demand and Supply
Equation
P Qd =20-2P Qs = -10+2P
0 20 -10
1 18 -8
2 16 -6
3 14 -4
4 12 -2
5 10 0
6 8 2
7 6 4
7.5 5 5
8 4 6
9 2 8
10 0 10