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Finding Equilibrium Price & Quantity, Elasticities

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In the following table is data that describe the market for gasoline in a small town. For each given price there is a quantity supplied (QS) and a quantity demanded (QD).

Price QS QD
0.5 30 193
0.6 35 186
0.7 40 180
0.8 45 173
0.9 50 166
1 55 160
1.1 60 153
1.2 65 146
1.3 70 140
1.4 75 133
1.5 80 126
1.6 85 120
1.7 90 113
1.8 95 106
1.9 100 100
2 105 93
2.1 110 86
2.2 115 80
2.3 120 73
2.4 125 66
2.5 130 60

1)Use the date to draw the supply and demand curves. Label the curves completely.
2)Calculate the equilibrium price and quantity in the gasoline market.
3)What would happen if the price goes up to 2.4 ( show graphically )
4) What would happen if the price goes down to 0.7 ( show graphically )
5)Calculate the price elasticity of demand at the equilibrium price using the exact (point) elasticity measure.
6)Calculate the price elasticity of the following ranges

a.Between P=0.5 and P=0.9
b.Between P=2.2 and P=2.5

7)Imagine that the small town introduces trolley service that will allow most of the residents to get around easily. What would you expect to happen to the demand for gasoline in the area? Would it become more or less elastic? Explain.

8)Draw the total revenue curve and show in the graph where are the elastic and inelastic regions.

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Solution Summary

The solution describes the steps determining equilibrium price and quantity graphically. It also explains the formulas to find point and arc elasticities.

Solution Preview

Please refer attached file for complete solution. Graphs and some formulas are missing here.

Solution:

1. Use the date to draw the supply and demand curves. Label the curves completely

2. Calculate the equilibrium price and quantity in the gasoline market.
Equilibrium point is the price at which Qd=Qs
We find the equilibrium point at P=1.9 where Qd=Qs=100

3)What would happen if the price goes up to 2.4 ( show graphically )

Refer to the graph. We find that at P=$2.4, Qd=66 and Qs=125
Qs>Qd, Surplus=Qs-Qd=59
There is a surplus of 59 units in the market.It is indicated by green line above.
Market forces will push the prices to decrease sothat surplus is cleared and equilibrium is attained.

4) What would happen if the price goes down to 0.7 ( show graphically )

Refer to the graph above, At P=$0.7, Qs=40 and Qd=180
Qs<Qd, Shortage=Qd-Qs=140
There is a shortage of 140 units In the maeket indicated by red line.
Market forces will push the prices to increase the prices sothat there is no shortages and equilibrium is ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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