Equilibrium price & quantity and total consumer surplus

Consider three supply & demand scenarios in this question. In each case, we have a perfectly competitive market and the market demand curve is given by P = $100 - Q where P is the market price and Q is the market quantity. In the first scenario, the market supply curve is given by P = $50. In the second, the market supply is given by P = Q and in the third, the market supply is given by Q = 50

For each scenario, calculate the equilibrium price and quantity, the total consumer surplus, and the total producer surplus.

Solution Preview

First Case:
Demand P=100-Q
Supply P=50
Equating demand and supply to get the equilibrium price and quantity, we get
100-Q=50
Q=50

The consumer surplus is the area between the demand curve and price line. The triangle formed by the following three points
1. Where demand curve intersects the Y axis. In this case, this point is P=100, Q=0
2. Where price line intersects the Y axis. In this case, this point is P=50, Q=0
3. Equilibrium point. P=50, Q=50
Consumer surplus = 0.5*(100-50)*50=1250

The producer surplus is the area between the supply curve and price line. The area formed by the following three points
1. Where supply curve intersects the Y ...

Solution Summary

This solution emphasizes equilibrium price and quantity, the total consumer surplus, and the total producer surplus.

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