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17 June, 12:14

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?

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  1. 17 June, 12:40
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    The effect will be a shortage of 2 products.

    Step-by-step 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.
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