UNIT ONE

LINEAR EQUATIONS AND

THEIR INTERPRETATIVE
APPLICATIONS
1
BY: H/mariam Kibret
UNIT OBJECTIVES
 Aftera thorough study of this unit, you will be
able to:
 Understand basic concepts of linear equations and
functions.
 Develop acquaintance of graphic representation of
linear equations.
 Compute and formulate slope and equation of a line.
 Systematically apply the linear equation algebra and
geometry in solving real world situations.

2
 INTRODUCTION
 Changing business environment - face problems and challenges
as well as prospects.
 Hence managers - make appropriate decisions and take actions
that enable the organization take advantages and overcome
difficulties.
 For the decisions and actions, they should apply mathematical tools
and quantitative techniques.
 Various decision with relation to one another has at least
approximated and explained by linear equations
 Eg. Sales volume can be linearly related to advertisement expense.
 Output level and number of employees engaged on some activity and cost of
production.
 Demand for and supply of a given product can be well approximated
and explained by a linear equation.
 In such real business instances, the concept and 3

interpretative application of linear equations have a

considerable importance.
INTRODUCTION …
 Cognizant to the above fact, we need to be well acquainted
with the fundamentals of linear equations algebra and
geometry as related to its business application.
 Hence the chapter, therefore, is dedicated to our study of linear
equations.
 The unit is organized in to two sections.

1. Basic concepts of linear equations and their

graphic representation and
2. Application of mathematical concepts of linear
equations in solving business problems .
4
SECTION ONE: LINEAR EQUATIONS,
FUNCTIONS AND GRAPHS
Section Overview:
Basic Concepts of Linear Equations and
Functions
Graph of a Linear Equation
The Distance between Two Points
Developing Equation of a Line

5
BASIC CONCEPTS OF LINEAR EQUATIONS AND FUNCTIONS
 Equation - statement of equality, which shows two
mathematical expressions are equal.
 Involve one or more unknown quantities that need to be solved.
 Linear equations are equations whose terms are a constant
times a variable to the first power.
 Equations that can be transposed to the form, a1 x1+ a2 x2+ …+ an
xn = c are said to be linear equations.
 a1, a2, a3, … an and c are constants

 x1, x2, x3, …xn are variables (unknown quantities)

 a1 x1, a2x2, … an xn and c are the terms of the equation

 (Terms are parts separated by plus, minus, and equal signs of LE)

6
 LINEAR EQUATION …
 Is an algebraic equation of the form y= mx+b. involving only a
constant and a first-order (linear) term.
 A mathematical statement which indicates two algebraic
expressions are equal.
 Example: Y = 2X + 3
 Are equations whose terms (the parts separated by +, -, = signs)
are a constant, or a constant times one variable to the first power
 Example: 2x – 3y = 7
* No X2, No X/Y, and no XY terms are allowed.


 Linear equations are equations whose slope is constant throughout

the line.

Slope- numerical value that describes the steepness of a line

7
determined by calculating the ratio of the vertical distance to the
horizontal distance (rise over run) between two points.
LINEAR EQUATIONS …
 In many business applications, a linear equation
may involve two variables, x and y, and
constants a, b, and c in which case the equation
relating x and y takes the form, a x + b y = c
 Examples of linear equations.
 2x + 3y = 9,
 3x – 9y + z = 23,
 4y + 7.5x – 11 = 14

8
NOTE:
 On the other hand, 4xy + 7x = 8 is not a
linear equation because the tem 4x y is a
product of a constant and two variables.
 Likewise 5 + 3y = 25 is not linear because
of the term 5 which is a constant times one
variable to the second – power.

9
EXAMPLE
 Assume that Ethiopian Electric Power Corporation Charges
Birr 0.55 per kilowatt-hour consumed and a fixed monthly
charge of Birr 7 for rent of electric meter.
 If y is the total monthly charge and x is the number of
kilowatt-hours consumed in a given month, write the equation
for y in terms of x.

10
SOLUTION
 Total monthly charge = 0.55 times the number of
monthly KWh consumption plus Birr 7 for meter
rent.
 Thus, using the symbols given, y = 0.55x + 7

 This equation is linear with two variable x and y.

 In such linear equations, constants can be positive

or negative, and can be fractions when graphs of
these equations is a straight line.

11
LINEAR FUNCTIONS
 Linear Functions: functional relationship refers to the case
where there is one and only one corresponding value of the
dependent variable for each value of the independent variable.
 The relationship between x and y as expressed by y = 0.55x +
7. is called a functional relationship
 For each value of x (independent variable), there is a single
corresponding value for y (dependent).
 Thus if we write y as expression involving x and constants x is
called the independent variable, then the value of y depends
upon what value we may assign to x and as a result it is called
the dependent variable.
 Therefore, a linear function refers to a linear equation, which
does have one corresponding value of dependent variable for 12
each value of the independent variable.
EXERCISE 1.1
 Suppose that a car rent company charges Birr 65
per hour a car is rented. In addition, Birr 150 for
insurance premium. Write the equation for the
total amount charged by the company in terms of
the hours the car is rented.

13
1.2 GRAPH OF A LINEAR EQUATION
 Linear equations in two variables can be plotted
on a coordinate plane with two dimensions.
 Such equations have graphs that are straight
lines.
 The graph of the relationship between the
variables takes the form of a straight line.
 Any straight-line graph can be sketched by
plotting just two points which satisfy the linear
equation and then joining them with a straight
line. 14
 EXAMPLE
 Sketch the graph of the equation 2y - 3x = 3.
 Solution

 Arbitrarily select two values for x and obtain the corresponding

values for y.
 Lets set x = 0. Then the equation becomes

 2y – 3(0) = 3.
 That is, 2y = 3
 y = 3/2
 This means that when x = 0, the value of y is 3/2.
 So, the point with coordinates (0, 3/2) lies on the line of 2y – 3x =
3.
 In the same way, let y = 0. Then the equation becomes -3x = 3.
15
That is, x = 3/-3 = -1.
THE GRAPH OF 2Y-3X = 3 IS

16
EXERCISE
Find two coordinate points that
satisfy the equation 3x + 4y = 24.
Then, using the two coordinate points
plot the graph of the given function.

17
1.3 THE DISTANCE BETWEEN TWO POINTS
 The distance between two points - length of a straight-line
segment that joins the points.
 The length is determined by applying algebraic procedures to
the x – and y coordinates of the end points of the segment.
 Distanceon horizontal and vertical line segments are used in
the computation of the distance.
 Distance on a vertical segment (vertical separation) is found
by computing the positive difference of the y- coordinates
of the end points of the segment.
 Distance on the horizontal segment (horizontal separation)
is found by computing the positive difference of the x-
coordinate of the end points of the segment.
18
DISTANCE …
 Thus, given two points (x1, y1) and (x2, y2),
 The quantity x2 – x1 is horizontal separation of the two
points.
 The quantity y2 – y1 is the vertical separation of the two
points.
 Example: Given the points A (-5, 7), B (-3, -9), C (-5,
15), D (12, 6), find the horizontal and vertical distance of
the segment,
a. AB
b. AD
c. BD
19
20
EXERCISE
 Find the vertical and horizontal separation
of the following points.
(5, 7) and (-3, 2)
( 5, - 3) and (-11, -7)
(6, 2) and (6, -4)
(3, 4) and (9, 4)

21
 DEAR STUDENT
 As you recall all lines in a coordinate plane are not vertical
and/or horizontal.
 Hence, the segment is slant to any direction and the actual
distance between (x1, y1) and (x2, y2) may be calculated from
Pythagoras Theorem”, using their horizontal and vertical
separations.

Places of Coordinates

22
23
1.4 DEVELOPING EQUATION OF A LINE

Three alternatives for developing the

equation of a straight line.
1. Slope-intercept form,
2. Slope-point form, and
3. Two-point form.

24
THE SLOPE – INTERCEPT FORM
• Slope - measure of steepness or inclination of a line
represented by the letter m.
• The slope of a non-vertical line is defined in
several ways.
• It is the rise over the run.
• It is the change in y over the change in x. Thus,
given coordinates of two points (x1, y1) and
(x2, y2)

25
1. THE SLOPE – INTERCEPT FORM
 If the value of the slope is positive, the
line rises form left to right.
 If the slope is negative, the line falls from
left to right.
 If the slope is zero, the line is horizontal.
 If the slope is undefined then the line is
vertical.

26
 EXAMPLE
 Obtain the slope of the straight-line segment joining the two
points (8, -13) and (-2, 5).

 Therefore, the line that passes through these two points falls
downwards from left to right.
 On the other hand, if the equation of a line is given, then the
slope can be determined more simply.
 Thus, if a linear equation is written in the form y = m x + b,
“m” is the slope and “b” is often referred as the intercept
term
27
 The intercept term is the value at which the straight line
intercepts the Y-axis.
EXAMPLE
 An agent rents car for one day and charges Birr 22 plus
20 cents per mile driven.
a) Write the equation for one day's rental (y) in terms of
the number of miles driven (x).
b) Interpret the slope and the y – intercept.

c) What is the renter's total cost if a car is driven 100

miles? What is the renter's cost per mile?
Solution
 Given fixed (constant) cost of Birr 22 = b

 Slope = m = 20 cents = Birr 0.2

 y = Total cost for one day rental

 x = Number of miles driven

 The 28
equation y = m x + b , y = 0.2x + 22
 EXAMPLE …
b. Interpretation
 The slope, m = 20 cents (Birr 0.2) means that each additional
mile driven adds 20 cents to total cost. b = Birr 22 is the fixed
cost (the amount to be paid irrespective of the mile driven).
 Hence, it will be the total cost when no mile is driven. m x + b,
y = 0.2x + 22
c. Total cost of driving 100 miles (x = 100), Y = 0.2x + 22
 Total cost of the renter (Y)= 0.2 (100) + 22 = Birr 42

29
 EXAMPLE
 Write 8x – 2y – 6 = 0 in slope intercept form and
determine slope and y-intercept of the equation. In
addition, find the coordinates of x- and y-intercept.
Solution
 We proceed to isolate y with a coefficient of one on the
left-hand side of the equation to obtain; y = m x + b form
finally.
 Thus, 8x – 2y – 6 = 0 is equivalent with

 8x – 2y = 6

 -2y = -8x + 6

30
EXAMPLE ….

 Therefore,y = 4x – 3 is an equation in the y =

m x + b form that is, 4 is the slope and -3 is the
y-intercept of the line. Further, the x-intercept
is found by setting y = 0. Thus, the value of x
when y=0 is,
y = 4(x) – 3
0 = 4(x) – 3 =
 Thex intercept coordinate is (3/4, 0). In the
same manner, we can obtain the y-intercept
coordinate is (0, -3).
31
2. THE SLOPE – POINT FORM
 In this form, the slope and a point on the line, say (x1,
y1) will be provided.
 Then, we determine the intercept from the slope and the
given point and develop the equation.
 Accordingly, the expression we need further is the
equation that is true not only for the point (x1, y1) but
also for all other points say (x, y) on the line.
 Therefore, we have points (x1, y1) and (x, y) with slope
m. The slope of the line is y - y1 / x - x1 and this is equal
for all pair of points on the line. Thus, we have

32
 THE SLOPE – POINT FORM
 The following formula for slope-point form:
 Alternatively, y – y1 = m (x – x 1)
 Example : Find the equation of a line that has a slope of 3 and
that passes through the point (3, 4).
Solution
 Given m = 3 and (x1, y1) = (3, 4). By substituting these values
in the formula
y – y 1 = m (x – x 1)
We will obtain y – 4 = 3 (x – 3).
Then, y – 4 = 3 x – 9
y=3x–9+4
y = 3 x – 5. 33
ANOTHER APPROACH FOR THE ABOVE
EG
 Inanother approach, y = m x + b where (x, y) =
(3, 4)
y = 3x + b
4 = 3(3) + b
4=9+b
4 – 9 = b = - 5 is the y-intercept.
Thus, y = 3x – 5 is the equation of the line.

34
EXERCISE
 Ifthe relationship between total cost (y)
and the number of units made (x) is linear
and if cost increases by Birr 3 for each
additional unit made and if the total cost
of making 10 units is Birr 40, find the
equation of the relationship between cost
and number of units made.

35
THE TWO – POINT FORM
 Two points on the line are given and used to determine
equation of a straight line.
 1st compute (m) and then use this value with either points to
generate the equation.
 Taking two points (x1 , y1) and (x2 , y2) and another point (x,
y), we can develop the expression for the equation of the line
as follows.
 Therefore, (y – y 1) (x 2 – x 1) = (y 2 – y 1) (x – x 1)

 is the expression for the two-point form of generating equation

of a straight line 36
 EXAMPLE
 A publisher asks a printer for quotations on the cost of printing
1000 and 2000 copies of a book. The printer quotes Birr 4500
for 1000 copies and Birr 7500 birr for 2000 copies. Assume that
cost (y) is linearly related to the number of books printed (x).
a. Write the coordinates of the given points
b. Write the equation of the line
Solution
Given the values:
 x 1 = 1000 Books y1= Birr 4500

 x 2 = 2000 books y2= Birr 7500

a. Coordinates of the points are: (x1, y1) and (x2, y2)

 Thus, (1000, 4500) and (2000, 7500)
b. To develop the equation of the line, first let's compute the 37
slope.
Then, consider the formula of two-point form of developing
equation of a line as given by,

We have obtained the value for the slope m = 3. Subsequently, by

substitution this value in the above formula will result in;

38
EXAMPLE …
 In continuation, substitute the value (1000,
4500) in place of x1 and y2 in the equation
 y – y1 = 3 (x – x1). As a result, we will obtain,

 y – 4500 = 3 (x – 1000)

 y – 4500 = 3x – 3000

 y = 3x – 3000 + 4500

 y = 3x + 1500 ……………………… is the

equation of the line.
39
EXERCISE
 As the number of units manufactured increases
form 100 to 200, manufacturing cost increases
form 350 birr to 650 birr. Assume that the given
data establishes relationship between cost (y)
and the number of units made (x), and assume
that the relationship is linear. Find the equation
of this relationship.

40
 SECTION TWO:
APPLICATIONS OF LINEAR EQUATIONS

LinearCost – Output Relations

Analysis
Market Equilibrium Analysis
Break – Even Analysis

41
 LINEAR COST – OUTPUT RELATIONS
ANALYSIS
 Our interest and purpose in the course is interpretive
application of it in the real world business environment.
 In this section we learn how we can approximate and relate
the mathematical terminology and technique of linear
equations in addressing real world business issues.
 Three application areas of linear equations.
 Linearcost – output relations analysis,
 Break – even analysis, and
 Market equilibrium analysis.

 In order to grasp the concept of linear cost output relations,

consider the relationship among different types of cost on the
following coordinate plane.
42
43
DEFINITION…
 Fixed cost is a cost component that does not
change with the number of units produced.
 The variable cost is a cost component that varies
with the number of units produced.
 Then at each level of production, total cost is the
summation of fixed cost and variable cost.
 Marginal cost is the additional cost incurred in
producing one more unit of output.

44
OBSERVATION …
Assume that total manufacturing cost
and the number of units produced are
linearly related.
The total cost originates from the fixed
cost line
At zero level of production, the total cost
will be equal to the fixed cost
45
ACCORDINGLY …

46
OBSERVATION …

47
EXAMPLE
Given the total cost function C = 5Q
+ 10 and if 10 units are produced,
find TC, AC, MC, FC and VC per
unit.

48
SOLUTION …

49
 EXAMPLE 1.12
 Ifthe total factory cost (y) of making x units of a
product is given by y = 3x + 20, and if 50 units
are made,
What is the variable cost (VC)?
What is the total cost (TC)?
What is the variable cost per unit (VC/unit)?
What is the average cost per unit (AC/ unit)?
What is the marginal cost of the 50th unit?

50
51
52
EXERCISE
Iftotal factory cost, y, of making x
units of a product is y = 10x + 500
and if 1,000 units are made:
What is the variable cost?
What is the total cost?
What is the variable cost per unit?
What is the marginal cost of the last
unit made? 53
BREAK – EVEN ANALYSIS
 An economic theory that states profits arise from the excess of
total revenue over total cost.
 This is, Profit = Total Revenue – Total Cost
 In the application of break-even analysis, there are two
important concepts we need to distinguish.
 break-even point and
 break-even chart.

 The break-even point (BEP) - volume or level of output

resulting in neither a loss nor a profit.
 Point at which revenue and cost are equal.
 Break-even chart is a convenient means of graphically
describing the relationship between cost and revenues at
different levels of output. 54
 CASES OF APPLYING BREAK EVEN ANALYSIS
 Two cases based on the type of business
1. break-even analysis for manufacturing companies.

2. Break even analysis for retail businesses.

Distinction
Manufacturing companies - state their cost equation in terms of
quantity (output) as their business involves producing and selling.
 The break-even point is computed in terms of output level.
Retail businesses - concerned with purchase and sell of
merchandise and state their cost equation in terms of revenue,
which is the same as the Birr (dollar) volume of sales.
 The break-even point is computed in terms of break-even level of sales
(dollar sales volume).

55
CASE 1: BREAK-EVEN ANALYSIS FOR MANUFACTURING
BUSINESSES
 Consider a manufacturer who produces q units of a
product and sells the product at a price of p per unit.
 Symbols to be used in our study of the case
 C = total cost of producing and selling q units
 q = number of units produced and sold
 v = variable cost per unit made (assumed to be
constant)
 FC = fixed cost (constant amount)
 P = Selling price per unit
 R = total revenue received, which is equal to sales
volume in terms of dollar or birr.

56
 The cost function then is given by:
C = v q + FC ……………………. (1) and,
 Revenue = Price per unit x Number of units sold
R = p q …………………………… (2)
 Thus, if the manufacture is to break – even on operations,
which is to neither incur loss nor earn profit, revenue (2)
must equal cost (1).
 That is, at break – even
p q = v q + FC …………………… (3)
 You may now solve equation (3) for the production volume
q;
p q = v q + FC
 p q – v q = FC
q (p – v) = FC Thus q = Thus, the Break – Even Quantity
57
denoted by qe, is given by;
q=
TO FURTHER OUR UNDERSTANDING OF BREAK-EVEN ANALYSIS,
LET US CONSIDER THE FOLLOWING BREAK-EVEN CHART.

58
 OBSERVATIONS:
 From the chart, we observe certain important points.
1. The total revenue line passes through the origin and hence has a y-
intercept of zero while the total cost line has a y – intercept which is equal
to the amount of the fixed cost.
2. The fixed cost line which is parallel to the quantity axis (x – axis) is
constant at all levels of output.
3. To the left of the break – even point the revenue line is found below the
cost line and hence any vertical separation indicates a loss while to the
right the opposite is true.
4. The total variable cost, which is the gap between the total cost and the
fixed cost line increases as more units are produced.
5. Important linear cost – output expressions (equations):
 C = v q + FC
 R=pq
 Average Revenue (AR) = R ÷ q = p q ÷ q = p
59
 Average Variable Cost (AVC) = v q ÷ q = v = Slope (m)
 Average Fixed Cost (AFC) = FC ÷ q
 Average Cost = C ÷ q = AVC + AFC
EXAMPLE
 A book company produces children's books. One time
fixed costs for Little Home are $12,838 that includes
fees to the author, the printer, and for the building.
Variable costs amount to $14.50 per book, the books are
then sold to bookstores around the country at $39.00
each. How many books must be printed and sold to
break-even?

60
 Then to obtain the
quantity of books
to be printed and
sold to break-even,
we need to equate
the R and C
equations.

Hence, q = 524 books must

be printed and sold to break 61

– even.
 EXAMPLE…
A manufacture has a fixed cost of Birr 60,000 and a
variable cost of Birr 2 per unit made and sold at
selling price of Birr 5 per unit. Required:
a) Write the revenue and cost equations
b) Compute the profit, if 25,000 units are made and
sold
c) Compute the profit, if 10,000 units are made and
sold
d) Find the breakeven quantity
e) Find the break-even birr volume of sales
f) Construct the break-even chart 62
SOLUTION

63
SOLUTION ….

64
SOLUTION ,,,

The manufacturer
losses Birr 30,000 at
10,000 units level of
production.

65
SOLUTION ….

66
SOLUTION ….
e. The break – even birr volume of sales can be
simply obtained by substituting the break – even
quantity in the revenue (R) equation. This is,
R = 5q
Substituting qe in place of q will result in, R
= p qe = 5 x 20,000
R = Birr 100,000

67
 SOLUTION…
f. In sketching break – even chart, first we need to find x – and y –
intercepts for both the revenue and cost equations.
 To this end, considering the cost equation, C = 2q + 60,000 we
can obtain; the y – intercept (at q = 0) = FC = Birr 60,000.
 Therefore, the cost equation arises from the point 60,000 on the
y- axis (cost and revenue axis). Alternatively, in a simple way,
the total cost line starts at the point of fixed cost.
 On the other hand, the graph for the revenue originates from the
origin because the revenue at zero production level is zero.
Further, the two lines crosses each other at the BEP which has a
coordinate of (20,000, 100,000), the 20,000 units on the quantity
axis (x – axis) and Birr 100,000 on cost revenue axis (y – axis).

68
69
CASE 2: BREAK – EVEN ANALYSIS FOR
RETAIL BUSINESSES
 Retail businesses and other financial managers are more
likely think of break-even analysis in accounting terms.
 In this case, we shall consider a retailer or company that
purchase products and sell them at a price above the
cost.
 The difference between the purchase cost and retail price
is known as ‘markup’.
 Markup is the component of profit but not exactly the
same as profit.
 Thus, certain costs must be deducted to obtain the profit.

70
EXAMPLE
 An item that costs Birr 860 is priced to sell at Birr 940.
Calculate the markup.
Solution
 Given the values, Cost = Birr 860 and Retail price = Birr
940
 Markup = Retail Price – Cost

= 940 – 860
 Markup = Birr 80
 Markup is viewed as a percentage of retail price
or as a percentage of cost.
71
MARKUP AS A PERCENTAGE OF RETAIL PRICE
 Markup percentage on retail price is also called
“margin‟ in financial statements and is given by

72
MARKUP AS A PERCENTAGE OF COST

Example
Assume an item that cost Birr 40 is made available for sale at a
price of Birr 48. Find the markup percentage on cost.

73
EXERCISE

Naïf supermarket purchases an item
at Birr 115 and resells it at a price of
Birr 128.
a) Compute the markup.
b) Compute the margin or markup as a
percentage of retail price.
c) Compute markup as a percentage on
cost. 74
 Consideringthe above concept about
markup and let us proceed to determining
the break-even level of sales.

75
DRIVING THE BREAK-EVEN LEVEL OF
SALES
 Let us symbolize some important components of
the formula. Thus, consider the equation
y = m x + b, where y = represent the total cost
m = represent the variable cost per dollar of sales
 x = represent the sales volume (Revenue)
 m x = total variable cost
 b = the fixed cost

76
 Former case, at break even revenue is equal to
cost. That is, y = x.
 Further, at break – even, the amount of dollar
sale is equal to the cost, thus the break – even
level of sales (Xe) is equal to y and x.
 Therefore, y = x = xe

 Then at the break-even point, y and x can be

substituted by Xe in the equation of
y = mx + b.
77
ACCORDINGLY,
 xe – m (xe) = b. Now let us solve for xe.
 xe = m(xe) + b

 xe – m (xe) = b

 xe (1 – m) = b

78
 EXAMPLE
 Suppose that in making a budget for next year’s operations top
management of XYZ Business Group has set a sales goal of Birr
200,000 per week. Margin is to be 45% of retail price and other
variable cost is estimated at Birr 0.05 per birr of sales. Fixed cost
is projected at Birr 56,000.
What is the linear sales-cost equation?
What is the breakeven volume of sales in birr per
week?
What is the company’s profit if sales goal is attained?
What is the company’s profit if it sells merchandise
that worth Birr 100,000?
Plot the company’s cost-sales model.
79
In addition, if margin is given as 45% the remaining 55% or 0.55
represent the cost. Thus, the variable cost per birr of sales is
equal to

80
81
c.For any amount of sales volume (Revenue)
greater than birr 140,000 profit will be attained. At
the targeted level of sale, the profit will be
obtained as follows.
Profit = Revenue – Cost – R-C
= 200,000 – (0.06x200 + 56,000)
= Birr 24,000
d. Profit if the sales volume (revenue) is birr 100,000.
 Profit (A) = R – C
 = 100,000 – (m x + b), since cost (c) or y = mx + b
 = 100,000 – (0.6 (100,000) + 65,000)
 = 100,000 – (60,000 + 56,000)
 = 100,000 – 116,000
 = (Birr -16,000) 82

Hence, at sales volume of birr 100,000 the company incurs a loss of

Birr 16,000.
e. Graph of cost – sales model or break – even chart
1. The break-even chart for sales volume is plotted in the
same manner with chat of loran-even quantity except
the x-axis in the former case represents dollar amount
of sales volume (revenue).
2. In the above diagram we note that the break-even point
coordinates are equal for both x and y axis since at this
point the cost and the revenue amount are equal and
both are expressed in terms of monetary (dollar) sales.
3. In the break even sales volume computation, the cost
equation, y = m x + b, is given in terms of sales
volume (Revenue) which is represented by x but, in
case of competing the break-even quantity, in the cost
equation y = m q + b, q represents the number of items83
or units produced. Thus, do not confuse x and q in the
former and later cases respectively.
 MARKET EQUILIBRIUM ANALYSIS
 Market equilibrium analysis is concerned with the
supply and demand of a product in a case they are
linearly related.
 Demand of a product: is the amount of a product
consumers are willing and able to buy at a given price
per unit.
 The linear demand function has a negative slope (falls
downward from left to right) since demand for a
product decreases as price increases.

84
 MARKET EQUILIBRIUM ANALYSIS
 Supply of a product: is the amount q, of a
product the producer is willing and able to supply
(make available for sell) at a given price per unit,
p.
 A linear supply curve or function has a positive
slope (rises upward from left to right) and the
price and the amount of product supplied are
directly related.
 This is because of the fact that suppliers are more
interested to supply their product when the 85
selling price increases.
 Market equilibrium: shows a market price that will
equate the quantity consumers are willing and able to
buy with the quantity suppliers are willing and able to
supply.

86
 EXAMPLE
 Suppose the supply and demand equation for a given product on a
given day reveal the following.
 Demanda (DD): P = 300 – 15q
 Supply (SS): P = 500 + 5q
a. Find the market equilibrium price and quantity.
b. Plot the demand and supply equation on a graph.
 Solution: First, let us compute the equilibrium quantity for the given
supply and demand functions.
 Hence, at equilibrium: DD = SS

 3000 – 15q = 500 + 5q

 -15q – 5q = 500 – 3000
 -20q = -2500
 q = -2500 ÷ -20
87
 q = 125 units

 Equilibrium price for the supply and demand
function of the given product.
 To compute the Market equilibrium price
substitute the market equilibrium quantity in
either of the supply or demand equations.
 Supply function: P = 500 + 5 q.
P = 500 + 5(125)
P = 500 + 625
P = Birr 1125
 Ordemand function: P = 3000 – 15 q and
substitute q = 125.
88
GRAPH OF DEMAND AND SUPPLY FUNCTION
 Get the x and y intercept for both the supply and demand
equations.
 The y – intercept for demand equation is obtained by setting q
= 0 in the equation P = 3000 – 15q. Thus, P = 3000 – 15(0) =
3000
 Therefore, (0, 3000) is the y-intercept. Likewise, the x
intercept is obtained by setting P = 0 in the equation P = 3000
– 15q. Consequently,
0 = 3000 – 15q
 15q = 3000 = 3000 ÷ 15
 q = 200
 The point (200, 0) is the x-intercept of the demand function.
89
GRAPH
 Follow the same procedure to find the x and y
intercept for the supply function of P = 500 + 5q.
The y – intercept is the value of P when q = 0.
 Therefore, P = 500 + 5(0)
P = 500
 The y – intercept is the point with coordinate of (0,
500).
 Inthe same manner, the x – intercept is the value
of q at P = 0.
 Thus, 0 = 500 + 5q
 -5q = 500 = 500 ÷ - 5
 q = -100
90
GRAPH …
 Hence, the x – intercept is given by the point (-100, 0). Off
course, the graph (the straight line) of the supply function is
also passes through the equilibrium point of (125 units, 1125
birr). Thus, we do not need to extend the line to the negative
direction.

91
EXAMPLE

 The market demand curve for a product is given by:

 DD: P = 200 – q
 SS: p = 50 + 0.5q

a. Find the excess demand at a price of Birr 80.

b. Find the excess supply at a price of Birr 130.
c. Find the equilibrium price and quantity.

92
SOLUTION
a. Given DD: P = 200 – q and P = Birr 80
 Thus, at a price of Birr 80 the quantity q, demanded is
computed by substituting 80 in place of p in the given
function, P = 200 – q.
 80 = 200 – q
 80 – 200 = -q
 -120 = -q
 q = 120 units
 This implies, at the price of Birr 80, the demand will be
120 units.
93
 Now we progress to computing the amount of supply at a price
of p = 80.
 Thus, SS: P = 50 + 0.5q
 80 = 50 + 0.5q
 80 – 50 = 0.5q
 q = 30 ÷ 0.5 = 60 unit.

 In this case, also if the price is Birr 80, the supply will be only
60 units.
 Therefore, in computing the excess demand, we take the
difference between the demand and supply for the product.
 Accordingly, Excess Demand = Demand – Supply
 = 120 units – 60 units
 = 60 units.
 Thus, if the price is Birr 80, there will be an excess demand for
60 units of the product. 94
b. Following the same procedure with the above case (i.e. item a), we
can find out the excess supply for the product at a price of Birr 130.
Accordingly, given demand function DD: P = 200 – q, we substitute
Birr 130 in place of p to get the quantity demanded at the said price.
 Thus, DD: p = 200 – q
 130 = 200 – q
 130 – 200 = - q
 q = 70 units.
 Therefore, at selling price of Birr 130, the demand is 70 units. On
the other hand, the supply at a price of Birr 130 is obtained by,
 SS: P = 50 + 0.5 q
 130 = 50 + 0.5 q
 130 – 50 = 0.5 q
 0.5 q = 80 95

 q = 160 units
 Then, the Excess Supply is attained by:
 Excess Supply = Supply – Demand
 = 160 units – 70 units
 = 90 units.
 In general, at selling price of p = 130 the excess supply is equal to 90 units.
 As we have seen earlier, equilibrium is attained when DD = SS.
 That is, 200 – q = 50 + 0.5 q
 200 – 50 = 0.5 q + q
 150 = 1.5 q
 q = 150 ÷ 1.5 = 100 unit.
 Hence, at equilibrium the quantity demanded will be 100 units. In parallel,
by substituting this value (100 units) in either of the supply or demand
functions, we can obtain the equilibrium price. Let us take the demand
function, DD: P = 200 – q and then substitute 100 in place of q, to obtain
 P = 200 – 100
 P = 100 Birr.
 Therefore, the market equilibrium price is Birr 100. 96
 EXERCISE
 Jemal Plc. is a national distributor of Dell Computers. The
selling price and quantity of computers distributed are linearly
related. Further, the company‟s market analyst found out the
following demand and supply functions for a particular year.
 Demand (DD): P = 3500 – 2q
 Supply (SS): - q = 950 – p

1. Find the excess demand for computers at a price of Birr 1400.

2. Find the excess supply of computers at a price of Birr 2100.
3. Find the market equilibrium quantity.
4. Find the market equilibrium price.
5. Sketch the demand and supply functions.

97
 Chapter Two
Matrix Algebra

98