Essential Mathematics for Economics and Business, 4 th Edition 1

CHAPTER 3: SIMULTANEOUS EQUATIONS

Worked Example 3.7

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Essential Mathematics for Economics and Business, 4 th Edition 2

Worked Example 3.7, Figure 3.5

Equilibrium in the goods market algebraically

Equilibrium in the goods market graphically

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Essential Mathematics for Economics and Business, 4 th Edition 3

Worked Example 3.7

Calculate the equilibrium price and quantity
Demand function: P = 100 - 0.5Q (1)

and

Supply function: P = 10 + 0.5Q (2)

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Essential Mathematics for Economics and Business, 4 th Edition 4

Equilibrium in the Goods Market

when
Qd = Qs and Pd = Ps

Quantity demanded by consumers

=
Quantity supplied

Price paid by consumers

=
Price suppliers are willing to accept

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Essential Mathematics for Economics and Business, 4 th Edition 5

Find the equilibrium price and quantity algebraically

Demand: Pd = 100 - 0.5Qd
Supply: Ps = 10 + 0.5Qs At equilibrium:
Qd = Qs
Pd = Ps
Equate prices

Pd = Ps

100 0.5Q = 10 + 0.5Q

In this
100 example
10 = it isrearranging
0.5Q + 0.5Q easier to equate
to solve prices,
for Q
because
90 = Q .this is the equilibrium quantity
the demand and supply functions are given in
the form
Next P P,
solve for = f(Q)
the equilibrium price
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Essential Mathematics for Economics and Business, 4 th Edition 6

Market Equilibrium
Now we know the equilibrium quantity
Qe = 90

Substitute Q = 90 into either (1) or (2) and solve for Q

Equilibrium
Q = 90
P = 100 - 0.5Q (1) Demand function P = 55
P = 100 - 0.5(90)
= 100 - 45
= 55 Pe = 55

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Essential Mathematics for Economics and Business, 4 th Edition 7

Find the equilibrium price and quantity graphically.

Method Overview:
1. Graph the demand function: P = 100 - 0.5Q
2. Graph the supply function: P = 10 + 0.5Q
3. Read off the point of intersection

Demand

Pe E Market equilibrium

Supply
0 Q
0 Q e

Goods market equilibrium

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Essential Mathematics for Economics and Business, 4 th Edition 8

Graph the demand function: P = 100 - 0.5Q

The demand function: P = 100 - 0.5Q
Vertical intercept at P = 100 : Plot this point

P
100

0 Q
0

Figure 3.5 Goods market equilibrium

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Essential Mathematics for Economics and Business, 4 th Edition 9

Graph the demand function: P = 100 - 0.5Q

The graph cuts the horizontal axis at P = 0.

100
Horizontal intercept, Q = = 200. Plot this point
0.5
P
100

0 Q
0 200

Figure 3.5 Goods market equilibrium

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Essential Mathematics for Economics and Business, 4 th Edition 10

Graph the demand function: P = 100 - 0.5Q

Join the vertical intercept P = 100 and the horizontal intercept Q = 200

P
100

P = 100 - 0.5Q

0 Q
0 200

Figure 3.5 Goods market equilibrium

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Essential Mathematics for Economics and Business, 4 th Edition 11

Graph the supply function: P = 10 + 0.5Q

The supply function: P = 10 + 0.5Q
Vertical intercept P = 10: Plot this point

P
100

10
P = 100 - 0.5 Q

Q
0 200

Figure 3.5 Goods market equilibrium

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Essential Mathematics for Economics and Business, 4 th Edition 12

Graph the supply function: P = 10 + 0.5Q

10
Horizontal intercept at Q = = -20 Plot this point
0.5

P
100

10 P = 100 - 0.5 Q

Q
0 200

Figure 3.5 Goods market equilibrium

- 20

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Essential Mathematics for Economics and Business, 4 th Edition 13

Graph the supply function: P = 10 + 0.5Q

Join the horizontal intercept Q = -20 and the vertical intercept P = 10.
Extend the line as required

P
100

P = 10 + 0.5Q

10 P = 100 - 0.5 Q

Q
0 200

Figure 3.5 Goods market equilibrium

- 20

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Essential Mathematics for Economics and Business, 4 th Edition 14

Equilibrium
Record the value of P at the point of intersection
Record the value of Q at the point of intersection

At equilibrium:
P Qd = Qs
100
Pd = Ps
P = 10 + 0.5Q

P = 55

P = 100 - 0.5Q
10
Q
- 20 0 Q = 90 200

Figure 3.5 Goods market equilibrium

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Essential Mathematics for Economics and Business, 4 th Edition 15

Equilibrium at P = 55, Q = 90

P
100

P = 10 + 0.5 Q

55 Market equilibrium

P = 100 - 0.5 Q
10
Q
0 90 200

Figure 3.5 Goods market equilibrium

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