EXERCISE

DIAGRAM AND CALCULATION

ANSWER

CHAPTER 3
Student Workpoint 3.3

The demand and supply functions for a product are given below:

Qd = 900 – 100P

Qs = 200P

1. Make a table to show the demand schedule and supply schedule for the product when prices
are $0, $1, $2, $3, $4, and $5.

Plug the value of prices in the demand and supply function, we get:

P 0 1 2 3 4 5
Qd 900 800 700 600 500 400
Qs1 0 200 400 600 800 1000

2. Draw a diagram to show the demand curve and supply curve that represent the demand and
supply schedules that you have made.
3. Illustrate the equilibrium price and quantity bought and sold.

P S2
D S1

5
E2
4

3 E1

100 400 600 700 900 1000 Q

500

4. Using simultaneous equations, calculate the equilibrium price and quantity.

𝑄𝑄 = 900 − 100𝑃𝑃
� 𝐷𝐷
𝑄𝑄𝑆𝑆 = 200𝑃𝑃

Solve for Q and P, we get: QE = 600, PE = 3

1
Now let us assume that the supply function for the product changes to:

Qs = -300 + 200P

5. Make a new table to show the supply schedule for the new supply function when prices are
$0, $1, $2, $3, $4, and $5. (Hint: supply may not take place at some of these prices.)

Plug the value of prices in the new supply function, we get:

P 0 1 2 3 4 5
Qs2 -300 -100 100 300 500 700

6. Add the supply curve that represents the new schedule to the diagram that you drew in 2.
7. Illustrate the new equilibrium price and quantity bought and sold.
8. Using the concept of excess demand, and referring to your diagram, explain why the
equilibrium price and equilibrium quantity demanded and supplied have changed.

As the supply curve shifts up and to the left, quantity is now supplied less than before.

Before adjustment: Quantity supplied changes: decreases at every prices. Market price and
quantity demanded have not changed.

At price of $3, which is the old equilibrium price, there is an excess demand: quantity demanded
of 600 (the old equilibrium quantity), but quantity supplied now equals to -300 +200 x 3 = 300.

Adjustment: To eliminate this shortage, consumers will raise their prices to attract producers to
supply more. As they do so, quantity supplied will increase and quantity demanded will
decrease.

After adjustment: As a result, the market price adjusts to a new higher position E2 = 4 at which
quantity supplied and demanded are once again equal to each other and thus a new equilibrium is
set.

9. Finally, identify and explain two factors that might have caused the change in the original
supply function.

Two factors that might have caused the change in the supply function:

(1) There is a increase in price of another product which is in competitive supply with this
product. The shared resource is now reallocated away from this product because selling
this product is now relatively less profitable, meaning that the quantity supplied for this
product is less than before.
(2) There is an increase in tax on sales of this product. This will encourage producers to raise
the price to pass on all the cost of tax-paying to consumers.