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Demandandsupplyfunctionsareusedtodescribetheconsumerandmanufacturerbehaviorwith
respecttothepriceofaproductorserviceandthequantityofaproductorservice.Differenttextbooks
mayusedifferentletterstorepresentthefunctionsandvariables.Intheexamplebelow,wellwritethe
pricesasafunctionofthequantity.
Inthisexample,thedemandfunctionisnamed P D(Q) .Inthiscontext,thequantityQisthe
independentvariableandthedemandfunctionyieldsthepricePthatconsumersarewillingtopayat
thatquantity.Similarly,thesupplyfunctionisnamed P S (Q ) .Thisfunctiongivesthesuppliers
behaviorwithrespecttopriceandquantity.
Thefunctionsbelowdescribetherelationshipbetweenpriceandquantityforaregionalpizza
restaurant.PaycarefulattentiontotheunitsonthevariableQ.Thisvariablehasbeenscaledto
thousandsofpizzas.Avalueof Q 2 correspondsto2thousand(2000)pizzas.
TheDemandFunction
Thedemandfunctionisforpizzasis
D (Q ) 3Q 25
whereQisthenumberofpizzassoldinthousands.
(2, 19)
Thislinearfunctiondescribestherelationshipbetweenpriceandquantityfromtheconsumers
perspective.Forinstance,ifwesubstitute Q 2 intothefunctionweget
D (2) 3 2 25 19
LinearDemandandSupplyFunctions
Thismeansthatatapriceof$19,consumersdemand2thousandpizzas.Inadditiontofindingtheprice
correspondingtoaquantity,wecanreversetheprocess.Tofindthequantityofpizzascorrespondingto
apriceof$13,setthedemandfunctionequalto13andsolveforQ:
13 3Q 25
12 3Q
4Q
Subtract25frombothsides
Dividebothsidesby3
Thismeansthatatapriceof$13perpizza,aquantityof4thousandpizzaswillbedemandedby
consumers.Thegraphalsomakessense.Ontheleftsideofthegraph,pricesarehighandthequantity
soldislow.Inotherwords,consumersarereluctanttopurchasepizzaswhenthepriceishigh.Onthe
rightsideofthegraph,thequantityishighandthepriceislow.Thismeansthatdemandishigherwhen
thepriceislower.Thistypeofrelationship,adecreasinglinearfunction,isoftenanexcellentmodelfor
reality.
High quantitydemanded
atalowprice
Lowquantitydemanded
athighprice
TheSupplyFunction
Asupplyfunctionmodelstherelationshipbetweenpriceandquantitywithrespecttothemanufacturer.
Supposethesupplyfunctionforthepizzarestaurantchainis S (Q) 2Q .
Thegraphbelowshowsthissupplyfunction.
LinearDemandandSupplyFunctions
Unlikethedemandcurvewhichwasdecreasing,thiscurveincreases.Letslookatpartsofthiscurve
closertoinsurethatitmakessense.
Lowquantitysuppliedat
alowprice
Highquantitysupplied
athighprice
Pointsontheleftsideofthegraphshowalowquantityandalowprice.Thismeansthatatalowprice,
thepizzarestaurantwillbewillingtosupplyalowquantityofpizzasperweek.Pointsontherightsideof
thegraphshowahighpriceandahighquantity.Thismeansthatatahighprice,thepizzarestaurantwill
bewillingtosupplyahighquantityofpizzasperweek.
Thisbehaviorisexactlywhatyouwouldexpectfromasupplier.Butitpointstoaninterestingirony.The
pizzarestaurantwantstosupplyhighernumbersofpizzasperweekwhenthepriceishigh.Butwhen
thepriceishigh,thenumberofpizzassoldislow.Wecanalsolookatitdifferentlybynotingthatwhen
thepriceislow,thepizzarestaurantdoesntwanttosellmanypizzasbuttheconsumerswanttobuy
more.Isthereaquantityandpricewhichwillsatisfythepizzarestaurantandtheconsumer?
LinearDemandandSupplyFunctions
TheEquilibriumPoint
Tosatisfyboththeconsumerandthemanufacturer,weneedtofindapriceandquantityoneachcurve
wherethepriceandquantityareexactlythesame.Atthisprice,thequantitydemandedbyconsumersis
thesameasthequantitysuppliedbythemanufacturer.Thispointiscalledtheequilibriumpoint.The
quantityattheequilibriumpointiscalledtheequilibriumquantity.Thepriceattheequilibriumpointis
calledtheequilibriumprice.
Itiseasytofindthispointonagraph.Wesimplyneedtofindthepointofintersectionofthedemand
function D (Q ) andthesupplycurve S (Q ) .Atthispoint,thevalueofPandQarethesameonboth
curves.
From the graph above, we can see that the equilibrium point is at approximately (5, 10). This is an
estimate basedonthescalingonthe graph.Tofindthe pointofintersectionexactly,we needtofind
wherethedemandandsupplycurvesareequalalgebraically.
HowToFindtheEquilibriumPointAlgebraically
Thepointofintersectionoftwographsisfoundbysettingthefunctionsformulasequalandsolvingfor
thevariable.Inthecaseofthesupplyanddemandfunctions,weset
S (Q) D(Q)
andsolveforQ.
Whenwesetthesupplyanddemandfunctionsequal,weget
2Q 3Q 25
LinearDemandandSupplyFunctions
Add 3Q tobothsidestoyield
5Q 25
Dividebothsidesby5andwegetanequilibriumquantityof Q 5 .Togettheequilibriumprice,we
needtoputthisquantityintoeitherthesupplyfunctionorthedemandfunction:
S (5) 2(5) 10
D (5) 3(5) 25 10
Thismeansthatatapriceof$10perpizza,thequantitydemandedbyconsumersis5000pizzasandthe
quantitythepizzachainiswillingtosupplyis5000pizzas.
HowToFindtheEquilibriumPointGraphically
Earlierweestimatedthepointofintersectionfromagraph.Youcanalsouseagraphingcalculatorto
finetunethatestimate.Tostart,graphbothfunctionsinanappropriatewindow.Thenwellusethe
CALCmenutofindthepointofintersection.
1. Enterthesupplyanddemandfunctionsintotheequationeditor
bypressingtheobutton.Youllneedtousethe
buttontotypexinplaceofQ.
2. Pressptoadjustthegraphingwindowtothevalues
showntotheright.
3. Toseethegraph,presss.Sincethepointofintersectionis
visible,wecanmoveontothenextstep.Ifthepointof
intersectionisnotvisible,readjustthewindowbypressing
p.
LinearDemandandSupplyFunctions
4. Tofindthepointofintersection,pressyrtoaccessthe
CALCmenu.Usetomoveyourcursorto5:intersectand
press.
5. Tofindthepointofintersection,youneedtohelpthecalculator
byindicatingthefirstcurveandthesecondcurve.Dothisby
movingthecrosshairstotheappropriatecurvewith}or
andpressingtoselectthecurve.
6. Nowmovethecrosshairswiththe|or~buttonsnearthe
pointofintersectiontosupplythecalculatorwithastarting
guess.
7. Presstofindthepointofintersection.
8. Theapproximatepointofintersectionisdisplayedonthe
screen.Rememberthatthisisanestimate.Inthiscase,the
estimatematchestheexactanswerwefoundalgebraically.