Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:
qD = 700 – p
qS = 500 + 3p for p ≥ 15
= 0 for 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?
Given –
qD = 700 – p
qS = 500 + 3p for p ≥ 15
= 0 for 0 ≤ p < 15
From the given data we can see that the market supply is zero for the price range Rupees 0 to Rupees 15 because it is less than the minimum of average variable cost, so no firm will produce any positive level of output and the market supply curve will be zero.
At equilibrium, qD = qS
700 – p = 500 + 3p
200 = 4p
P = 50
Therefore, the equilibrium price is Rs 50.
At equilibrium price, the equilibrium quantity will be
qS = 500 + 3p
= 500 + 3 (50)
= 650 units.
Therefore, the equilibrium quantity is 650 units.