Chapter 3: Simultaneous Equations

Worked Example 3.7, Figure 3.5

 Equilibrium in the goods market algebraically: Slides 2, 3, 4
 Equilibrium in the goods market graphically (Show): Slides 5 - 17

Worked Example 3.12, Figure 3.8

 Effect of a per unit tax on the supply function: Slide 18, 19
 Distribution of Tax: Slides 20, 21, 22

Worked Example 3.14, Figure 3.10

 Calculate the break-even point: TR = TC: Slide 23, 24, 25

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 1

 Equilibrium in the Goods Market exists when
Q  Q and P  P
d s d s

Worked Example 3.7:

Given the demand and supply functions:
P = 100 - 0.5Q
and
P = 10 + 0.5Q, respectively,
find the values of P and Q for which the market is in equilibrium
(a) algebraically
(b) graphically

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 2

 Find the equilibrium price and quantity algebraically
 State the equilibrium condition:
Qs = Qd and Ps = Pd
 Equate prices
 It is easier to equate prices, since
the demand and supply functions have been given in the form P = f(Q))
Pd  Ps
100  0 . 5Q  10  0 . 5Q ... equating equations (3.2) and (3.3)
100 -10 = 0 .5Q  0 . 5Q
90  Q ... equilibrium quantity

 hence solve for Q:

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 3

 When the equilibrium quantity is known, find the
equilibrium price, algebraically

Now that the equilibrium value of Q has been determined,

 substitute the equilibrium quantity, Q = 90 into either the supply or
demand function
 hence solve for the equilibrium price, P

P  100  0 . 5(90) ... substituting Q  90 into the demand equation

P  55 ... equilibrium price

 Hence the equilibrium price and quantity is Q = 90, P = 55

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 4

 To find the equilibrium price and quantity graphically

 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

 Start by graphing each function

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 5

 Method Overview:

1. Graph the demand function: P = 100 - 0.5Q

2. Graph the supply function: P = 10 + 0.5Q
3. Read off the point of intersection

Demand

Pe E Market equilibrium

Supply
0 Q
0 Q e

Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 6

 Graph the demand function: P = 100 -0.5Q

For the demand function: P = 100 - 0.5Q

Vertical intercept = 100 : Plot this point

P
100

0 Q
0

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 7

 Graph the demand function: P = 100 -0.5Q

100
Horizontal intercept = = 200 : Plot this point
0.5

P
100

0 Q
0 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 8

 Graph the demand function: P = 100 -0.5Q

Join the vertical intercept = 100 and the horizontal intercept= 200

P
100

P = 100 - 0.5Q

0 Q
0 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 9

 Graph the supply function: P = 10 + 0.5Q

For the supply function: P = 10 + 0.5Q

Vertical intercept = 10: Plot this point

P
100

10
P = 100 - 0.5Q

Q
0 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 10

 Graph the supply function: P = 10 + 0.5Q

10

Horizontal intercept = 0.5 = - 20: Plot this point

P
100

10 P = 100 - 0.5Q

Q
0 200

Figure 3.5 Goods market equilibrium

- 20

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 The market is in equilibrium occurs at Q  Q and P  P d s d s

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

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 12

 The market is in equilibrium occurs at Q  Q and P  P d s d s

First record the value of P, at the point of intersection

P
100

P = 10 + 0.5Q

point of intersection

P = 100 - 0.5Q
10
Q
0 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 13

 The market is in equilibrium when Q  Q and P  P d s d s

P = 55 at the point of intersection

P
100

P = 10 + 0.5Q

55 point of intersection

P = 100 - 0.5Q
10
Q
0 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 14

 The market is in equilibrium when Q  Q and P  P d s d s

Next, record the value of Q at the point of intersection

P
100

P = 10 + 0.5Q

55 point of intersection

P = 100 - 0.5Q
10
Q
0 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 15

 The market is in equilibrium when Q  Q and P  P d s d s

Q = 90 at the point of intersection

P
100

P = 10 + 0.5Q

55 point of intersection

P = 100 - 0.5Q
10
Q
0 90 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 16

 The market is in equilibrium when Q  Q and P  P d s d s

The market is in equilibrium at P = 55, Q = 90

P
100

P = 10 + 0.5Q

55 Market equilibrium

P = 100 - 0.5Q
10
Q
0 90 200

Figure 3.5 Goods market equilibrium

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 17

 Worked Example 3.12
Effect of a per unit tax on the supply function
 When a tax of 6 per unit is imposed the producer receives (P - 6) per unit:
 The equation of the supply function is adjusted:
 (P - 6) = 10 + 0.5Q. That is P =16 + 0.5Q

110

P
P = 10 + 0.5 Q (No tax:):

16
10
0 Q
0 200

Construction of Figure 3.8 Goods market equilibrium and taxes

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 18
 Worked Example 3.12
Effect of a per unit tax on the supply function
 The equation of the supply function adjusted for tax is: P =16 + 0.5Q
 The graph of the tax adjusted supply function is parallel to the original,
 translated vertically upwards by 6 units (see Figure 3.8)

with tax :P = 16 + 0.5Q

P
P = 10 + 0.5 Q

16
10
0 Q
0 200

Construction of Figure 3.8 Goods market equilibrium and taxes

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 19
 Worked Example 3.12
Effect of a per unit tax on the supply function
With the tax, the equilibrium price and quantity change to: P = 58; Q = 84

 The consumer pays the market equilibrium price: P = 58

with tax P = 16 + 0.5 Q

P
P = 10 + 0.5Q

E1
58
55 E0

P = 100 - 0.5Q
16
10
0 Q
0 84 90 200

Figure 3.8 Goods market equilibrium and taxes

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 20

 Worked Example 3.12
Effect of a per unit tax on the supply function
With the tax, the equilibrium price and quantity change to: P = 58; Q = 84

When a tax is imposed the producer receives the market equilibrium price, less tax

with tax :P = 16 + 0.5Q

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

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 21

  The consumer pays the new equilibrium price, P = 58
 The producer receives the new equilibrium price, less tax: P = 58 - 6 = 52
 After the imposition of a tax of 6 per unit, the consumer pays 3 units more
and the producer receives 3 units less than before the imposition of tax

110 with tax : P = 16 + 0.5Q

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

Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 22

 Total Revenue: Plot TR = 3Q
TR TR = 3 Q
45
40

35
30

25

20
15
10

5
0 Q
0

10

12

14
Construction of Figure 3.10
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 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
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 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
Copyright©2001 Teresa Bradley and John Wiley & Sons Ltd 25