- The supply function is given to you. It is Q = -7909.89 + 79.0989P. You have to calculate the demand function. The regression equation is the demand function, but you have to keep all factors that affect the demand constant, except for the price. So, you can plug in the provided values of Px, I, A, and M in the regression equation. Thus, you will derive the demand function, which shows the relationship between quantity demanded and price assuming that nothing else changes.
Here is and example based on the demand equation in the sample analytical problem.
QD = 15,000 – 10 P + 1500 A + 4 PX + 2 I
Q = Quantity demanded
P = Price = 7,000
A = Advertising expense, in thousands = 54
PX = Price of competitor’s product = 8,000
I = Average monthly income = 4,000
QD = 15,000 – 10 P + 1500 (54) + 4 (8,000) + 2 (4,000)
QD = 15,000 – 10 P + 81,000 + 32,000+ 8,000
QD = 136,000 – 10 P (this is the demand function)
Follow the graphing instructions to plot the demand curve.
- Enter in one column the prices 100, 200,…,600
- Calculate the quantity demanded at each price using the demand function in a second column.
- Then, graph the demand curve using the graphing instructions.
- Use the supply function and follow the instructions to graph it.
- The equilibrium point would be the point of intersection between demand and supply curves. The equilibrium price corresponding to this point is on the vertical axis, and the equilibrium quantity corresponding to this equilibrium point is on the horizontal axis.
- To answer this question, review the demand and supply factors.