Suppose the demand and supply curves of a Commodity-X is given by the following two equations simultaneously: Qd = 200 – p, Qs = 50 + 2p

i) Find the equilibrium price and equilibrium quantity.

ii) Suppose that the price of a factor of production producing the commodity has changed, resulting in the new supply curve given by the equation Qs’ = 80 +2p. Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity.

The market is in equilibrium when quantity demanded equals quantity supplied.

200-p = 50+2p

3p = 150

P = 50

Qd = 200 – 50

= 150 = Qs

ii)

The market is in equilibrium when quantity demanded equals quantity supplied.

200-p = 80+2p

3p = 120

P = 40

Qd = 200 – 40

= 160 = Qs

When the price of the factor input changes, the equilibrium quantity has increased from 150 to 160 and the equilibrium price has decreased from 50 to 40. Thus there has been a reduction in the price of the factor input resulting in the changes in the quantity demanded and supplied.