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    The Maths of Demand, Supply and Linear Equations

    Uploaded by

    Ana Del Carmen Vilchez
    This document discusses using systems of linear equations to find market equilibrium. It uses the example of a lemonade business owner, Max, who wants to understand supply and demand to set the optimal price. The document explains how to graph the supply and demand functions as lines and find their equations by determining the slope and y-intercept. For the supply function, the slope is found to be 0.1, meaning price increases 10% for each additional unit supplied. The supply equation is determined to be p=0.1q+3.75. Then, using two data points for demand, the slope of the demand line is found to be -0.1, meaning price decreases as quantity demanded increases.

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    The Maths of Demand, Supply and Linear Equations

    Uploaded by

    Ana Del Carmen Vilchez
    459 views3 pages
    This document discusses using systems of linear equations to find market equilibrium. It uses the example of a lemonade business owner, Max, who wants to understand supply and demand to set the optimal price. The document explains how to graph the supply and demand functions as lines and find their equations by determining the slope and y-intercept. For the supply function, the slope is found to be 0.1, meaning price increases 10% for each additional unit supplied. The supply equation is determined to be p=0.1q+3.75. Then, using two data points for demand, the slope of the demand line is found to be -0.1, meaning price decreases as quantity demanded increases.

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    IB Economics

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    This document discusses using systems of linear equations to find market equilibrium. It uses the example of a lemonade business owner, Max, who wants to understand supply and demand to set the optimal price. The document explains how to graph the supply and demand functions as lines and find their equations by determining the slope and y-intercept. For the supply function, the slope is found to be 0.1, meaning price increases 10% for each additional unit supplied. The supply equation is determined to be p=0.1q+3.75. Then, using two data points for demand, the slope of the demand line is found to be -0.1, meaning price decreases as quantity demanded increases.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    459 views3 pages

    The Maths of Demand, Supply and Linear Equations

    Uploaded by

    Ana Del Carmen Vilchez
    This document discusses using systems of linear equations to find market equilibrium. It uses the example of a lemonade business owner, Max, who wants to understand supply and demand to set the optimal price. The document explains how to graph the supply and demand functions as lines and find their equations by determining the slope and y-intercept. For the supply function, the slope is found to be 0.1, meaning price increases 10% for each additional unit supplied. The supply equation is determined to be p=0.1q+3.75. Then, using two data points for demand, the slope of the demand line is found to be -0.1, meaning price decreases as quantity demanded increases.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Applying Systems of Linear Equations

    to Market Equilibrium: Steps &


    Example
    Businesses use market equilibrium to determine price and sell products. Learn
    how to use systems of linear equations to find market equilibrium in this video
    lesson. Review what you know with a short quiz!
    LINEAR MODELS AND LEMONS
    Max is a lemonade millionaire with his
    own lemonade stand company, Xtreme
    Lemon. Max needs to understand
    supply and demand so he can find
    market
    equilibrium. Market
    equilibrium is when the amount of
    product produced is equal to the
    amount of quantity demanded. We can see equilibrium on a graph when the
    supply function and the demand function intersect, like shown on this graph.
    Max can then figure out how to price his new lemonade products based on
    market equilibrium. Let's break this down one line at a time.
    MARKET EQUILIBRIUM
    This is the line of the supply function. On the graph, the y-axis represents the
    price of a product, while the x-axis represents the quantity of the product. So
    if we put a point at (10, 10) on this line, that would tell us that Max is willing
    to supply 10 cups of lemonade if he can charge $10 for each cup. This is a
    pretty fancy cup of lemonade if you ask me.
    Let's say that Max has changed his mind and is now willing to supply 12.5
    cups of lemonade, but only if the price of the lemonade is $5 per cup. He is
    also willing to supply 30 cups of lemonade for $6.75 per cup. We can put that
    information into two points on a graph like this: (12.5, 5) and (30, 6.75).
    Now we have two points but no line. We need to write an equation to finish
    this supply function. To do this, you need to know the slope formula, which
    is m = (y2 - y1) / (x2 - x1), and the linear equation is y = mx + b.

    FINDING THE SUPPLY FUNCTION


    1. Find the slope: m = (y2 - y1) / (x2 - x1).
    a. Plug in the numbers 12.5, 5, 30, and 6.75 and evaluate the
    equation:
    m = (6.75 - 5) / (30 - 12.5)
    m = 1.75 / 17.5
    m = 0.1
    Okay, so for this equation we know that slope is 0.1, which is the same as a
    10% increase in price.
    Now, we need to find the y-intercept of the equation. We will use the pointslope form to find the y-intercept. We can use our smallest numbered point
    (12.5, 5) and our slope, 0.1, to solve the equation, although you can use
    which ever point you choose. Plug the numbers into the equation and
    evaluate:
    (y - 5) = 0.1(x - 12.5)
    Use the distributive property.
    y - 5 = 0.1x - 1.25
    Add like terms.
    y = 0.1x + 3.75
    Now we know that the supply function for Max's Xtreme Lemon product is y =
    0.1x + 3.75.
    Basically, the 3.75 represents the overall cost of making the product
    or the lowest price that the product can be supplied. Also, you would
    normally replace the y with a p to indicate the price of the product and x with
    a q to indicate the quantity of the product supplied. I left the y and x in while
    we were working to prevent confusion, but you really need to get used to
    seeing supply functions written like this: p = 0.1q + 3.75. It is also good to
    note here that the slope of the supply function will always be positive.

    FINDING THE DEMAND FUNCTION


    Max conducts a survey to find the demand function for his consumer
    audience. He finds that the consumers are willing to buy 60 cups of lemonade
    if the lemonade is $4 a cup. They are also willing to pay $7 per cup of
    lemonade, but they will only buy 30 cups. This makes sense because most

    people are more likely to buy a lot of a product if it is less expensive. In fact,
    the law of demand states the quantity demanded will increase as the price
    of the product decreases. Try pausing the video and work the equations as we
    go!
    Let's use the slope formula first to figure out the rate of this equation. Plug
    the numbers into the slope formula and evaluate. My points are (60, 4) and
    (30, 7):
    m = (y2 - y1) / (x2 - x1).
    m = (7 - 4) / (30 - 60)
    m = 3 / -30
    m = -0.1

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