Using Demand Fuctions

How to find equilibrium price and quantity mathematically

Summary: To get equilibrium price and quantity,

1) Solve for the demand and supply function in terms of Q (quantity).
2) Set Qs (quantity supplied) equal to Qd (quantity demanded).
3) Solve for P, this is your equilibrium Price.
4) Plug your equilibrium price into either your demand or supply function (or both) and solve for
Q, which will give you equilibrium quantity.

When solving for equilibrium price and quantity, you need to have a demand function, and a
supply function. Sometimes you will be given an inverse demand function (ie. P = 5 –Q) in this
case you need to solve for Q as a function of P. Once you have both your supply and demand
function, you simply need to set quantity demanded equal to quantity supplied, and solve.

For example, if your monthly quantity demand function for a product is Qd = 10,000-80P, and
your monthly quantity supply function for a product is Qs=20P, then set Qd=Qs and solve.

𝑄𝑑 = 𝑄𝑠 or 10,000 – 80𝑃 = 20𝑃

Add 80P to both sides, then divide by 100 to get:

100 = P

Which is our equilibrium price. Now to find equilibrium quantity we can plug our equilibrium
price (100) into either our demand or supply function. If we plug it into our demand function we
get:

𝑄𝑑 = 10,000 – 80 × 100 = 2,000

If we plug it into our supply function we get:

𝑄𝑠 = 20 × 100 = 2,000

Luckily, our quantity supplied equaled our quantity demanded so we know that we did it right.

So the steps are:

1) Get functions solved for Qs (quantity supplied) and Qd (quantity demanded).
2) Set Qs equal to Qd
3) Solve for P (equilibrium price)
4) Plug your P back into your Qs and Qd functions to get equilibrium quantity

What’s going on behind the scenes? The reason we set Qs equal to Qd is because we know that
in equilibrium they must be equal. Since supply and demand will only cross at one point, we
know that when Qs = Qd that we are at equilibrium. We can use this information to solve for
 equilibrium price even though we don’t know what Qd and Qs are! Once we do have
equilibrium price, we can use this information to back out what Qs and Qd are.

Another example:
Suppose that demand is given by the equation 𝑄𝐷 = 500 – 50𝑃, where QD is quantity
demanded, and P is the price of the good. Supply is described by the equation 𝑄𝑆 = 50 + 25𝑃
where QS is quantity supplied. What is the equilibrium price and quantity?

So here we get:
𝑄𝑑 = 𝑄𝑠 = 500 − 50𝑃 = 50 + 25𝑃
or (subtract 50 from both sides, and add 50P to both sides to get)
450 = 75𝑃

divide both sides by 75 to get P = 6.

𝑃𝑙𝑢𝑔 𝑃 = 6 𝑖𝑛𝑡𝑜 𝑏𝑜𝑡ℎ 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛𝑠:

500 − 50(6) = 200
𝑎𝑛𝑑
50 + 25(6) = 200

So we know that equilibrium price is 6, and equilibrium quantity is 200

How to find Arc (Mid-point Formula) Elasticity and Point Elasticity using Demand
Functions

Note the following:

 When changes in price and quantity are big, the arc elasticity or point elasticity formulas
provide a more accurate elasticity coefficient than the basic elasticity formula.
 The arc elasticity captures the responsiveness of one variable to another between two given
points.
 The midpoint method can be used if just two points on the demand curve are known. You do
not need to know the function relating price and quantity demanded to use this method.
 The point elasticity captures the change in quantity demanded to a tiny change in price. To
calculate the point elasticity, you must have a function for the relationship between price and
quantity.
Arc Elasticity
The elasticity of one variable with respect to another between two given points.
For Example:
Determine the elasticity of demand when the price falls from 136 to 119, given the demand
function P = 200 − Q2
Solution
We are given that P1 = 136 and P2 = 119 .The corresponding values of Q1 and Q2 are obtained
from the demand equation
 P = 200 − Q2
by substituting P = 136 and 119 respectively and solving for Q. For example, if P = 136 then
136 = 200 − Q2 which rearranges to give

Q2 = 200 − 136 = 64
This has solution Q = ±8 and, since we can obviously ignore the negative quantity (note the –
sign helps to determine direction of change and type of good etc refer to class notes), we have
Q1 = 8. Similarly, setting P = 119 gives Q2 = 9. The elasticity formula is
∆𝑄 𝑃
𝐸 = ×−
∆𝑃 𝑄
and the values of ∆P and ∆Q are easily worked out to be
∆P = 119 − 136 = −17
∆Q = 9 − 8 = 1
However, it is not at all clear what to take for P and Q. Do we take P to be 136 or 119?
Clearly we are going to get two different answers depending on our choice. A sensible
compromise is to use their average and take
P = 1/2(136 + 119) = 127.5 i.e. 1/2(P1 + P2)
Similarly, averaging the Q values gives
Q = 1/2(8 + 9) = 8.5 i.e. 1/2(Q1 + Q2)
Hence
1 127
𝐸 = ( )×− = 0.88
−17 8.5

Practice Problem
Given the demand function P = 1000 − 2Q calculate the arc elasticity as P falls from 210 to
200.

Point elasticity
 The measure of the change in quantity demanded to a very small change in price. To calculate
the point elasticity, you must have a function for the relationship between price and quantity.
For Example:
The daily demand function for Christmas trees in mid-December can be used to illustrate the
calculation of the point price elasticity. Suppose that demand can be written algebraically as
quantity demanded per day:
𝑄𝑑 = 45,000 − 2,500𝑃 + 2.5𝑌
If one is interested in determining the point price elasticity when the price (P) is equal to $40 and
per capita disposable personal income (Y) is equal to $30,000, taking the partial derivative of Qd
with respect to P yields
𝜕𝑄𝐷
= −2,500 trees per dollar
𝜕𝑃

Substituting for the relevant values of P and Y gives

𝑄𝐷 = 45,000 − 2,500(40) + 2.50(30,000) = 20,000
40
From which we obtain 𝐸𝐷 = −2500 × (20,000) = −0.5

Using the same methodology, you can find the income elasticity of demand.
Point Elasticity another Example
Given the demand function P = 50 − 2Q.find the elasticity when the price is 30. Is demand
inelastic, unit elastic or elastic at this price?
Solution
To find dQ/dP we need to differentiate Q with respect to P. However, we are actually given a
formula for P in terms of Q, so we need to transpose
P = 50 − 2Q
for Q. Adding 2Q to both sides gives
P + 2Q = 50
and if we subtract P then
2Q = 50 − P
Finally, dividing through by 2 gives
Q = 25 − 1/2P
Hence
𝑑𝑄 1
= −2
𝑑𝑃

We are given that P = 30 so, at this price, demand is

Q = 25 − 1/2(30) = 10
These values can now be substituted into
𝑑𝑄 𝑃
𝐸= ×−
𝑑𝑃 𝑄

Read Mathematical illustration of relationship between marginal revenue, total revenue

and elasticity page 80-83