Consider the following demand and supply functions for a good:

Quantity demanded = 160 - 2p Quantity supplied = -40 + 2p

(i) Calculate the equilibrium price and quantity.

(ii) Find out a price at which there is excess demand.

(iii) Find out a price at which there is excess supply.

(a) Quantity demanded = 160-2p

Quantity supplied = -40 + 2p

Equilibrium is attained at a point where market demand is equal to market supply, i.e.

Quantity demanded = Quantity supplied Hence, 160 - 2p = - 40+2p

160 + 40 =2p +2p

200 = 4p, p = 200/4 = 50

Hence, equilibrium price = Rs. 50

Equilibrium quantity will be,

Quantity demanded = Quantity supplied = 160-2p= 160-2x50 = 160 - 100 = Rs.60

(b) At any price below the equilibrium price there will be excess demand.

Let us take at price Rs. 20

At p = Rs. 20

Quantity demanded =160-2p = 160-2 x20 = 160-40 = Rs120

Quantity supplied = -40 + 2p = -40 + 2 x 20 = -40 + 40 = 0

Quantity demanded > Quantity supplied [excess demand]

Also it can be concluded that at Rs. 20 there will be no supply of the commodity, hence between 20 < p < 50, there will be excess demand.

© At any price above equilibrium, there will be excess supply.

Let us take at price Rs. 80

Quantity demanded = 160-2p = 160 - 2 x80 = 160 - 160 = 0

Quantity supplied = -40 + 2p

= -40 + 2 x 80 = -40 + 160 = 120

Quantity demanded < Quantity supplied [excess supply]

Also, it can be concluded that at p = ? 80 demand will be zero, hence there will be excess supply between 50 <p < 80.