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Demand and Supply Functions

1) A demand function expresses the demand for a product in relation to its price and other determinants like income and substitute prices. The function takes the form of Qd = a - bP, where a is all non-price factors and b is the slope. 2) A supply function explains the relationship between the supply of a commodity and factors like its price. The function takes the form of Qs = c + dP, where c is all non-price factors and d is the slope. 3) Equilibrium occurs when quantity demanded equals quantity supplied (Qd = Qs). This happens at the equilibrium price where the demand and supply curves intersect.

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247 views35 pages

Demand and Supply Functions

1) A demand function expresses the demand for a product in relation to its price and other determinants like income and substitute prices. The function takes the form of Qd = a - bP, where a is all non-price factors and b is the slope. 2) A supply function explains the relationship between the supply of a commodity and factors like its price. The function takes the form of Qs = c + dP, where c is all non-price factors and d is the slope. 3) Equilibrium occurs when quantity demanded equals quantity supplied (Qd = Qs). This happens at the equilibrium price where the demand and supply curves intersect.

Uploaded by

Timmy Clyde
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Demand and Supply Function

Walter Ila
Demand Function
Mathematical equation which expresses the
demand of a product in relation to the
determinants of demand e.g. its price and other
factors such as the prices of the substitutes and
complementary goods, income,
Price being the main determinant of demand is
what normally is used to show the demand
function
Demand function

Qd = 20 – 2P

The function can be used to derive a demand


schedule and plot a demand curve
Demand Schedule Contd.
Price (Kshs.) 2 4 6 8
Quantity Demanded 16 12 8 4
(Kgs)
Supply Function

Mathematical equation that explains the


relationship between the supply of a
commodity and the factors determining its
supply. It takes the form:
Qs = –30 + 20 P
Supply Schedule

Price (Kshs.) 2 4 6 8 10
Quantity 10 50 90 130 170
supplied(Kgs)
• Given the following Economic Functions,
determine the equilibrium price and
equilibrium quantity
a) Qd =100-20 P
Qs =-5 + 15 P
b) Qd = 50 - 5P
Qs = 5 + 10P.
Demand Function

Qd = a – b(P)
Qd = quantity demanded
a = all factors affecting
price other than price (e.g.
income, fashion)
b = slope of the demand
curve
P = Price of the good
•A demand function is a mathematical
equation which expresses the demand of a
product or service as a function of the
determinants of demand e.g. its price and
other factors such as the prices of the
substitutes and complementary goods,
income,
Demand Function

Qd = 20 – 2P
Demand Schedule from a demand function

Price 2 4 6 8 10
Quantity 16 12 8 4 0
Demanded
Supply Function

•It explains the relationship between the supply


of a commodity and the factors determining its
supply. We can better represent the supply
function in the form of the following equation:
Supply Function

Qs = –30 + 20 P
Supply schedule from supply function

Price 2 4 6 8 10
Quantity 10 50 90 130 170
supplied
Determination of Prices

1. Bargaining /Haggling:-Price is between the seller’s


lowest and the buyer’s highest
2. Tendering:-Lowest bid is the price of the
commodity
3. Auctioning :-Highest bid is the price of the
commodity
4. Price Mechanism :-forces of demand and supply
interact freely
5. Price control :-Government interferes with the
forces of demand and supply (set a price)
Equilibrium illustrated
Price Mechanism (Invisible Hand)

• Equilibrium Point: Point of intersection


between the demand curve and the supply
curve
• Equilibrium Price:
• Equilibrium quantity :
• At equilibrium Qd=Qs
Calculating Equilibrium price
and Equilibrium Quantity
• Given the following functions calculate the equilibrium price
and equilibrium quantity
Q = 100 – 6P
Q = 28 + 3P
At equilibrium Qd=Qs
100 – 6P = 28 + 3P
-6P-3P=28-100
-9P=-72
P=8 (Equilibrium Price)
Q=100-6(8)
Q=52 (Equilibrium Quantity)
Illustration and questions

Given the following functions calculate the


equilibrium price and equilibrium quantity
1. P = 80 - Q , P = 20 + 2Q
2. Q=3300−2P, Q=500+8P
3. Q = 66-3P; Q = -4+2P
4. Q = 16-2P; Q = 2+5P
1. P = 80 - Q ,
P = 20 + 2Q
At equilibrium the Qd=Qs
80 – Q= 20 + 2Q
-Q-2Q=20-80
-3Q=-60
Q=60/3
Q=20
P=80-20
P=60
P = 80 - Q ,
80 – Q=P
-Q=P-80
-1(-Q)=-1(P-80)
Q=80-P
Q=80-P
Price 20 40 60 80
Quantity 60 40 20 0
Demanded
P = 20 + 2Q
20 + 2Q=P
2Q=P-20
Q=0.5P-10
Q=-10 +0.5P
Q=-10 +0.5P
Price 20 40 60 80
Quantity 0 10 20 30
Supplied
Plot the demand and supply curve on the same
graph

Price 20 40 60 80
Quantity 60 40 20 0
Demanded
Quantity 0 10 20 30
supplied
2. Q=3300−2P, Q=500+8P
At equilibrium the Qd=Qs
3300−2P= 500+8P
-2P-8P=500-3300
-10P=-2800
P=2800/10
P=280
Q=3300-560
Q=2740
3. Q = 66-3P; Q = -4+2P
At equilibrium the Qd=Qs
66-3P = -4+2P
-3P-2P=-4-66
-5P=-70
P=70/5
P=14
Q=66-42
Q=24
3. Q = 16-2P; Q = 2+5P
At equilibrium the Qd=Qs
16-2P = 2+5P
-2P-5P=2-16
-1(-7P)= -1(-14)
P=14/7
P=2
Q=16-4
Q=12
Exercise

6. The demand and supply in a market are


described by the equations
Qd = 66-3P
Qs = -4+2P
How would a per unit tax of 10/- affect this
equilibrium
PRICE CONTROL

Government sets a legal minimum or


maximum prices set for specified goods.
Means of direct economic intervention to
manage the affordability of certain goods.
It may be done in two ways :
a) Maximum Price Legislation (Price
Ceiling)
b) Minimum Price Legislation (Price
Floor)
Price Control Contd.

a) Maximum Price Legislation (Price


Ceiling):-Price is set below the
equilibrium price . It helps protect the
consumers against exploitation
b) Minimum Price Legislation (Price
Floor):- Price is set above the
equilibrium price . It helps protect the
producers against exploitation
Maximum Price Legislation

Price Ceiling
Minimum Price Legislation

• Price Floor
Price Control Contd.
Elasticity as a tool

Measures the change in the quantity


demanded/quantity supplied for a good or service
due to the changes in price
a) Elasticity of demand:- degree of
responsiveness of the quantity demanded
of a commodity to changes in the price of
the commodity
b) Elasticity of supply :- degree of
responsiveness of the quantity supplied of
a commodity to changes in the price of
the commodity

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