LinearDemandandSupplyFunctions

Demandandsupplyfunctionsareusedtodescribetheconsumerandmanufacturerbehaviorwith
respecttothepriceofaproductorserviceandthequantityofaproductorservice.Differenttextbooks
mayusedifferentletterstorepresentthefunctionsandvariables.Intheexamplebelow,wellwritethe
pricesasafunctionofthequantity.
Inthisexample,thedemandfunctionisnamed P D(Q) .Inthiscontext,thequantityQisthe
independentvariableandthedemandfunctionyieldsthepricePthatconsumersarewillingtopayat
thatquantity.Similarly,thesupplyfunctionisnamed P S (Q ) .Thisfunctiongivesthesuppliers
behaviorwithrespecttopriceandquantity.
Thefunctionsbelowdescribetherelationshipbetweenpriceandquantityforaregionalpizza
restaurant.PaycarefulattentiontotheunitsonthevariableQ.Thisvariablehasbeenscaledto
thousandsofpizzas.Avalueof Q 2 correspondsto2thousand(2000)pizzas.

TheDemandFunction
Thedemandfunctionisforpizzasis

D (Q ) 3Q 25

whereQisthenumberofpizzassoldinthousands.

(2, 19)

Thislinearfunctiondescribestherelationshipbetweenpriceandquantityfromtheconsumers
perspective.Forinstance,ifwesubstitute Q 2 intothefunctionweget

D (2) 3 2 25 19

LinearDemandandSupplyFunctions

Thismeansthatatapriceof$19,consumersdemand2thousandpizzas.Inadditiontofindingtheprice
correspondingtoaquantity,wecanreversetheprocess.Tofindthequantityofpizzascorrespondingto
apriceof$13,setthedemandfunctionequalto13andsolveforQ:

13 3Q 25
12 3Q

4Q

Subtract25frombothsides
Dividebothsidesby3

Thismeansthatatapriceof$13perpizza,aquantityof4thousandpizzaswillbedemandedby
consumers.Thegraphalsomakessense.Ontheleftsideofthegraph,pricesarehighandthequantity
soldislow.Inotherwords,consumersarereluctanttopurchasepizzaswhenthepriceishigh.Onthe
rightsideofthegraph,thequantityishighandthepriceislow.Thismeansthatdemandishigherwhen
thepriceislower.Thistypeofrelationship,adecreasinglinearfunction,isoftenanexcellentmodelfor
reality.

High quantitydemanded
atalowprice

Lowquantitydemanded
athighprice

TheSupplyFunction
Asupplyfunctionmodelstherelationshipbetweenpriceandquantitywithrespecttothemanufacturer.
Supposethesupplyfunctionforthepizzarestaurantchainis S (Q) 2Q .
Thegraphbelowshowsthissupplyfunction.

LinearDemandandSupplyFunctions

Unlikethedemandcurvewhichwasdecreasing,thiscurveincreases.Letslookatpartsofthiscurve
closertoinsurethatitmakessense.

Lowquantitysuppliedat
alowprice

Highquantitysupplied
athighprice

Pointsontheleftsideofthegraphshowalowquantityandalowprice.Thismeansthatatalowprice,
thepizzarestaurantwillbewillingtosupplyalowquantityofpizzasperweek.Pointsontherightsideof
thegraphshowahighpriceandahighquantity.Thismeansthatatahighprice,thepizzarestaurantwill
bewillingtosupplyahighquantityofpizzasperweek.
Thisbehaviorisexactlywhatyouwouldexpectfromasupplier.Butitpointstoaninterestingirony.The
pizzarestaurantwantstosupplyhighernumbersofpizzasperweekwhenthepriceishigh.Butwhen
thepriceishigh,thenumberofpizzassoldislow.Wecanalsolookatitdifferentlybynotingthatwhen
thepriceislow,thepizzarestaurantdoesntwanttosellmanypizzasbuttheconsumerswanttobuy
more.Isthereaquantityandpricewhichwillsatisfythepizzarestaurantandtheconsumer?

LinearDemandandSupplyFunctions

TheEquilibriumPoint
Tosatisfyboththeconsumerandthemanufacturer,weneedtofindapriceandquantityoneachcurve
wherethepriceandquantityareexactlythesame.Atthisprice,thequantitydemandedbyconsumersis
thesameasthequantitysuppliedbythemanufacturer.Thispointiscalledtheequilibriumpoint.The
quantityattheequilibriumpointiscalledtheequilibriumquantity.Thepriceattheequilibriumpointis
calledtheequilibriumprice.
Itiseasytofindthispointonagraph.Wesimplyneedtofindthepointofintersectionofthedemand
function D (Q ) andthesupplycurve S (Q ) .Atthispoint,thevalueofPandQarethesameonboth
curves.

From the graph above, we can see that the equilibrium point is at approximately (5, 10). This is an
estimate basedonthescalingonthe graph.Tofindthe pointofintersectionexactly,we needtofind
wherethedemandandsupplycurvesareequalalgebraically.

HowToFindtheEquilibriumPointAlgebraically
Thepointofintersectionoftwographsisfoundbysettingthefunctionsformulasequalandsolvingfor
thevariable.Inthecaseofthesupplyanddemandfunctions,weset

S (Q) D(Q)

andsolveforQ.
Whenwesetthesupplyanddemandfunctionsequal,weget

2Q 3Q 25

LinearDemandandSupplyFunctions

Add 3Q tobothsidestoyield

5Q 25

Dividebothsidesby5andwegetanequilibriumquantityof Q 5 .Togettheequilibriumprice,we
needtoputthisquantityintoeitherthesupplyfunctionorthedemandfunction:

S (5) 2(5) 10
D (5) 3(5) 25 10

Thismeansthatatapriceof$10perpizza,thequantitydemandedbyconsumersis5000pizzasandthe
quantitythepizzachainiswillingtosupplyis5000pizzas.

HowToFindtheEquilibriumPointGraphically
Earlierweestimatedthepointofintersectionfromagraph.Youcanalsouseagraphingcalculatorto
finetunethatestimate.Tostart,graphbothfunctionsinanappropriatewindow.Thenwellusethe
CALCmenutofindthepointofintersection.
1. Enterthesupplyanddemandfunctionsintotheequationeditor
bypressingtheobutton.Youllneedtousethe
buttontotypexinplaceofQ.

2. Pressptoadjustthegraphingwindowtothevalues
showntotheright.

3. Toseethegraph,presss.Sincethepointofintersectionis
visible,wecanmoveontothenextstep.Ifthepointof
intersectionisnotvisible,readjustthewindowbypressing
p.

LinearDemandandSupplyFunctions

4. Tofindthepointofintersection,pressyrtoaccessthe
CALCmenu.Usetomoveyourcursorto5:intersectand
press.

5. Tofindthepointofintersection,youneedtohelpthecalculator
byindicatingthefirstcurveandthesecondcurve.Dothisby
movingthecrosshairstotheappropriatecurvewith}or
andpressingtoselectthecurve.

6. Nowmovethecrosshairswiththe|or~buttonsnearthe
pointofintersectiontosupplythecalculatorwithastarting
guess.
7. Presstofindthepointofintersection.

8. Theapproximatepointofintersectionisdisplayedonthe
screen.Rememberthatthisisanestimate.Inthiscase,the
estimatematchestheexactanswerwefoundalgebraically.