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Question:

Suppose the demand and supply curve of commodity XX in a perfectly competitive market are given by:

qD =700 - p

qs = 500 + 3p for p ≥ 15

= 0 or 0 ≤ p <15

Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than Rs 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?

Answer:

It is given that;
qd = 700 – p
qs = 500 + 3p for p &gt; Rs 15
= 0 for 0 ≤ &lt; p 15
 
The market supply is zero for any price from Rs 0 to Rs 15, this is because, for price between 0 to 15, no individual firm will produce any positive level of output (as the price is less than the minimum of AVC). Consequently, the market supply curve will be zero.
At equilibrium qd = qs
700 - p = 500 + 3p
- p -3p = 500 – 700
- 4p = - 200
p = 50
Equilibrium price is Rs 50.
Quantity = qs = 500 + 3p
= 500 + 3 (50)
= 500 + 150
= 650
Therefore, the equilibrium quantity is 650 units.


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