The demand function is Q_d = 100 - 2P and the supply function is Q_s = 4P - 20. What is the equilibrium price?
A$10
B$15
C$20
D$25
Set Q_d = Q_s: 100 - 2P = 4P - 20, so 120 = 6P, giving P = 20. At P = 20, Q = 100 - 2(20) = 60, and Q_s = 4(20) - 20 = 60. Both sides equal 60, confirming the market clears. A common error is to set Q = 0 or to solve only one equation rather than equating both sides.
Question 2 True / False
Once a market reaches equilibrium, it will remain at that price and quantity unless a government regulation changes the price.
TTrue
FFalse
Answer: False
Equilibrium is a tendency the market moves toward, not a permanent fixed state. Any shift in supply or demand — from changes in consumer income, input costs, technology, tastes, prices of related goods, or expectations — shifts the relevant curve and changes the equilibrium price and quantity. Markets face constant real-world disturbances and are continuously adjusting toward a moving equilibrium.
Question 3 Short Answer
Explain why a price above the equilibrium price creates downward pressure on price, using the logic of surpluses and seller incentives.
Think about your answer, then reveal below.
Model answer: At a price above equilibrium, quantity supplied exceeds quantity demanded — a surplus. Sellers cannot move all they have produced. To clear excess inventory, competing sellers cut prices. This downward adjustment continues until quantity supplied equals quantity demanded, driving the price back to equilibrium.
This self-correcting mechanism requires no central authority — it emerges from the decentralized decisions of competing sellers facing unsold goods. The symmetric case (price below equilibrium) creates a shortage, and competing buyers bid prices up. These two pressures converge on the single market-clearing price.