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Demand supply numerical 2_Fall 2010

# Demand supply numerical 2_Fall 2010 - Economics 2100 Fall...

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1 Economics 2100. Fall 2010. Vivek Ghosal 2. Demand Supply Numerical #2 In class we discussed movements along and shifts of the demand and supply. Below is a hypothetical example applied to hybrid cars. A. Initial equilibrium Consider the market for medium sized hybrid cars. You are given the following information. Market demand: P=50,000-Q D Market supply: P=10,000+0.5Q S Where P is the market price and Q’s are the quantities. Equilibrium occurs when Q D =Q S =Q * , where Q * is the equilibrium quantity transacted. To solve set: 50,000-Q * =10,000+0.5Q * . This gives us Q * =26,666 cars. Plug this value into the expression for the demand function to get the equilibrium price P * = \$23,333/car. B. Demand shift Let there be a change in the market. Let the price of gasoline, a complementary product to cars, increase. Since the medium sized hybrids are highly fuel efficient, many consumers switch from preferring larger and less fuel efficient cars to the hybrids. This will cause the demand function for hybrid cars to shift right.

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