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METHOD:
Plot the demand function: P = 100 - 0.5Q
Plot the supply function: P = 10 + 0.5Q
The lines meet in a point.
This is the equilibrium point, therefore,
The co-ordinates of the point of intersection is the value of
the equilibrium price and quantity:
Qs = Qd and Ps = Pd at equilibrium
Demand
Pe E Market equilibrium
Supply
0 Q
0 Q e
P
100
0 Q
0
100
Horizontal intercept = = 200 : Plot this point
0.5
P
100
0 Q
0 200
Join the vertical intercept = 100 and the horizontal intercept= 200
P
100
P = 100 - 0.5Q
0 Q
0 200
P
100
10
P = 100 - 0.5Q
Q
0 200
10
Horizontal intercept = 0.5 = - 20: Plot this point
P
100
10 P = 100 - 0.5Q
Q
0 200
Join the horizontal intercept = -20 and the vertical intercept = 10.
Extend the line as required
P
100
P = 10 + 0.5Q
P = 100 - 0.5Q
10
Q
- 20 0 200
P
100
P = 10 + 0.5Q
point of intersection
P = 100 - 0.5Q
10
Q
0 200
P
100
P = 10 + 0.5Q
55 point of intersection
P = 100 - 0.5Q
10
Q
0 200
P
100
P = 10 + 0.5Q
55 point of intersection
P = 100 - 0.5Q
10
Q
0 200
P
100
P = 10 + 0.5Q
55 point of intersection
P = 100 - 0.5Q
10
Q
0 90 200
P
100
P = 10 + 0.5Q
55 Market equilibrium
P = 100 - 0.5Q
10
Q
0 90 200
110
P
P = 10 + 0.5 Q (No tax:):
16
10
0 Q
0 200
P
P = 10 + 0.5 Q
16
10
0 Q
0 200
P
P = 10 + 0.5Q
E1
58
55 E0
P = 100 - 0.5Q
16
10
0 Q
0 84 90 200
When a tax is imposed the producer receives the market equilibrium price, less tax
P
P = 10 + 0.5Q
E1
Consumer price 58
55 E0
Producer price 52
P = 100 - 0.5Q
0 Q
0 84 90 200
Figure 3.8 Goods market equilibrium and taxes
P
P = 10 + 0.5Q
E1
Consumer price 58
55 E0
Producer price 52
P = 100 - 0.5Q
0 Q
0 84 90 200
Figure 3.8 Goods market equilibrium and taxes
35
30
25
20
15
10
5
0 Q
0
10
12
14
Construction of Figure 3.10
Copyright2001 Teresa Bradley and John Wiley & Sons Ltd 23
Total Revenue: Plot TC = 10 + 2Q
TC
45
40
35
TC = 10 + 2 Q
30
25
20
15
10
5
0 Q
0
10
12
14
Construction of Figure 3.10
Copyright2001 Teresa Bradley and John Wiley & Sons Ltd 24
Break-even when Total Revenue = Total Cost
TC TR TR = 3 Q
45
40
Break-even point
35 TC = 10 + 2 Q
TC = TR = 30
25
20
15
At break-even, Q = 10
10
5
0 Q
0
10
12
14
Figure 3.10
Copyright2001 Teresa Bradley and John Wiley & Sons Ltd 25