In a market with a fixed number of firms, qD = 500 – 2p and qS = 50 + 3p. A rise in the price of an input changes the supply curve to qS = 3p – 25. Which of the following is correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → At the old equilibrium price there is an excess demand of 75 units; the new equilibrium is Rs 105 and 290 units
Given:
qD = 500 − 2p
Old supply: qS = 50 + 3p
New supply: qS = 3p − 25
Find the old equilibrium by setting market demand equal to market supply.
\( 500 - 2p = 50 + 3p \)
\( 5p = 450 \)
\( p = 90 \)
\( q = 500 - 180 = 320 \)
At the old price of Rs 90, the new supply is smaller.
\( q^S = 3 \times 90 - 25 = 245 \)
\( ED = 320 - 245 = 75 \)
Now find the new equilibrium.
\( 500 - 2p = 3p - 25 \)
\( 5p = 525 \)
\( p = 105 \)
\( q = 500 - 210 = 290 \)
There is an excess demand of 75 units at the old price, and the new equilibrium is Rs 105 and 290 units.
Option (3) At the old equilibrium price there is an excess demand of 75 units; the new equilibrium is Rs 105 and 245 units — 245 is only the new supply at the old price.
NCERT (2026-27): “Supply Shift … Now, suppose due to some reason, the market supply curve shifts leftward to SS2 with the demand curve remaining unchanged, as shown in panel (a). Because of the shift, at the prevailing price, p0, there will be excess demand equal to q0'' qo in the market. Some consumers who are unable to obtain the good will be willing to pay higher prices and the market price tends to increase. The new equilibrium is attained at point G where the supply curve SS2 intersects the demand curve DD0 such that q2 quantity will be bought and sold at price p2. …” “Supply Shift … Let us consider a situation where all other things remaining constant, there is an increase in the price of an input used in the production of a commodity. This will increase the marginal cost of production of the firms using this input. Therefore, at each price, the market supply will be less than before. Hence, the supply curve shifts leftward. In the Figure 5.3(a), this is shown by a shift in the supply curve from SS0 to SS2. But this increase in input price has no impact on the demand of the consumers since it does not depend on the input prices directly. Therefore, the demand curve remains unchanged. In Figure 5.3(a), this is shown by the demand curve remaining unchanged at DD0. As a result, compared to the old equilibrium, now the market price rises and quantity produced decreases.” |