Analyze Market Demand And Conduct Equilibrium Calculations

Analyze Market Demand and Conduct Equilibrium Calculations

given demand and supply functions, profits, and market scenarios, analyze equilibrium points and other economic indicators as specified.

Paper For Above instruction

In this paper, I will analyze multiple economic scenarios involving demand and supply functions, using algebraic methods to determine equilibrium points, demand elasticity, and the implications of government interventions such as price floors and taxes. The analysis will include solving for equilibrium price and quantity, calculating inverse demand functions, maximizing net benefits, assessing surplus or shortages, and understanding the impact of taxes on consumer surplus. These computations are essential for understanding market dynamics and informing policy decisions, which are common tasks in microeconomic analysis and managerial decision-making.

Economic Equilibrium and Demand Analysis

The first scenario involves determining the equilibrium quantity and price where the quantity demanded equals the quantity supplied. The demand function is given as Qd = 10,000 – 80P, and the supply function as Qs = 20P. To find the equilibrium, set Qd equal to Qs:

10,000 – 80P = 20P

Adding 80P to both sides yields: 10,000 = 100P

Dividing both sides by 100 gives the equilibrium price: P = 100

Next, substitute P = 100 into either the demand or supply equation to find the equilibrium quantity:

  • Using Qd: 10,000 – 80(100) = 10,000 – 8,000 = 2,000
  • Using Qs: 20(100) = 2,000

Both calculations confirm that the equilibrium quantity is 2,000 units and the equilibrium price is $100.

Inverse Demand Function

The inverse demand function is derived by solving the demand equation for P:

Qd = 10,000 – 80P

Rearranged as: 80P = 10,000 – Qd

Therefore, P = (10,000 – Qd) / 80

This function shows the maximum price consumers are willing to pay for any given quantity Qd.

Maximizing Net Benefit in Benefit-Cost Functions

In the second scenario, the benefit function B(X) = 600X – 12X2 and the cost function C(X) = 20X2 are analyzed to find the optimal level of X that maximizes net benefit, defined as NB = B(X) – C(X).

Calculate the net benefit:

NB = (600X – 12X2) – 20X2 = 600X – 32X2

To find the maximum, differentiate NB with respect to X and set to zero:

d(NB)/dX = 600 – 64X = 0

Solving for X yields:

X = 600 / 64 ≈ 9.375

This is the level of X that maximizes the net benefit. To verify it’s a maximum, the second derivative:

d2(NB)/dX2 = –64

indicates a concave function and confirms a maximum at X ≈ 9.375.

The maximum net benefit value can be computed by substituting X back into NB:

NB ≈ 600(9.375) – 32(9.375)2 ≈ 5625 – 32(87.89) ≈ 5625 – 2812. ≈ 2813

Market Equilibrium with Demand and Supply Functions

For the demand Qd = 50 – P and supply Qs = 2.5 + 1.5P, the equilibrium is where Qd equals Qs:

50 – P = 2.5 + 1.5P

Rearrange to isolate P:

50 – 2.5 = 1.5P + P

47.5 = 2.5P

So, P = 47.5 / 2.5 = 19

Substitute P into either equation to find Q:

  • Qd = 50 – 19 = 31
  • Qs = 2.5 + 1.5(19) = 2.5 + 28.5 = 31

The equilibrium price is $19 and the equilibrium quantity is 31 units.

If a price floor of $25 is imposed, since it is above the equilibrium price, the quantity demanded will decrease, and quantity supplied will increase, leading to surplus. The surplus can be calculated by assessing quantities at the floor price:

Qd at P=25: 50 – 25 = 25

Qs at P=25: 2.5 + 1.5(25) = 2.5 + 37.5 = 40

The surplus is Qs – Qd = 40 – 25 = 15 units.

If the government buys this surplus, the cost is: 15 units * $25 = $375.

Market with Supply and Demand Functions under Taxation

Considering Qs = 4P – 120 and Qd = 1000 – 10P, the equilibrium can be found by setting Qs equal to Qd:

4P – 120 = 1000 – 10P

Add 10P to both sides and add 120 to both sides:

4P + 10P = 1000 + 120

14P = 1120

P = 1120 / 14 = 80

Substitute P into either equation to obtain Q:

  • Qd = 1000 – 10(80) = 1000 – 800 = 200
  • Qs = 4(80) – 120 = 320 – 120 = 200

Thus, equilibrium price is $80 and quantity is 200 units. With a $2 excise tax, the new supply function effectively shifts as sellers receive P – 2, leading to a new equilibrium:

Set Qs = 4(P – 2) – 120:

4P – 8 – 120 = 1000 – 10P

4P – 128 = 1000 – 10P

Add 10P to both sides and add 128 to both sides:

4P + 10P = 1000 + 128

14P = 1128

P = 1128 / 14 ≈ 80.57

New quantity demanded and supplied at this price are:

Qd = 1000 – 10(80.57) ≈ 1000 – 805.7 ≈ 194.3

Qs = 4(80.57) – 120 ≈ 322.28 – 120 ≈ 202.28

Consumer surplus decreases because consumers pay a higher effective price, and producer surplus is affected accordingly.

Conclusion

This comprehensive analysis demonstrates the process of solving for equilibrium points, assessing market surplus, and understanding the impacts of government interventions on markets. These calculations are fundamental to microeconomic theory and important for policy analysis, business strategy, and supply chain management. As seen, algebraic and calculus methods enable us to evaluate and predict market behavior effectively, supporting informed decision-making in economic environments.

References

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