Question

Suppose the market supply and market demand for a product are given by P = 2 + Qs and P = 14 − Qd , respectively (where P is price (in dollars), Qs is quantity supplied and Qd is quantity demanded). What will be the effect on the market if the government sets a price ceiling of $7?

Answer 1

The effect will be a shortage of 2 products.

Explanation:

You know that the demand is given by the following equation: P = 14 - Qd and the supply is given by P = 2 + Qs. From these equations you can determine the quantity demanded and offered of a product at a certain price, simply replacing its numerical value in the equation and calculating Qd and Qs.

If the government sets a maximum price of $ 7, you can determine the quantity demanded and offered,simply replacing in the equations and isolating the value of Qs and Qd :

Market supply: P=2+Qs ⇒ 7=2+Qs ⇒ Qs=5

So, the quantity offered by the market is 5 products at the price of $ 7.

Market demand: P=14 - Qd ⇒ 7=14 - Qd ⇒ Qd= 7

So, the quantity demanded by the market is 7 products at the price of $ 7.

You can see that the market demands more than it can offer. This means that there are shortages, in this case of 2 products, obtained by subtracting the quantity of product demanded and the quantity offered.