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Economic Theory

First, rewrite the demand price and supply price equations without the
subscripts. That is, P = 40 – 2Q, and P = 0 + 1,75Q. Now set the two
equations equal to each other by writing:
40 – 2Q = 0 + 1,75Q

Now solve for Q.
1,75Q + 2Q = 40 – 0

3,75Q = 40
Q = 10,667
This is the equilibrium quantity, rounded to three decimals.
To obtain the equilibrium price, insert the equilibrium quantity into

either the demand or supply equation. In fact, try both and make certain
you get the same answer using either equation:
P = 40 – 2(10.667) = $18,67

or
P = 0 + 1.75(10.667) = $18,67.
Therefore the equilibrium price, rounded to two decimals (pennies), is
$18.67.

Once again, the market-clearing price is obtained by inserting the Q
obtained here into either the linear supply or the linear demand function.

5. Elasticity of Demand and Supply
In economics, the term elasticity can be defined as the responsiveness
of one economic variable to a change in another economic variable. A

basic definition of elasticity is the percentage change in one economic
variable divided by the percentage change in a second economic variable.

A key assumption is that the first economic variable will respond to
changes in the second economic variable. Thus there must be a logical
reason to believe that the two variables are somehow linked.
What response demand of a commodity shows when there is either

increase or decrease in its price, is explained with the help of elasticity.
Managers have great advantages by knowing elasticity of the products he
is selling. Greater response means greater elasticity and small response

indicates less elasticity. A manager is very interested in knowing whether
sales will increase by 4 percent, 10 percent or more by cutting down price
by 8 percent. Elasticity of demand, thus, measures the degree of
responsiveness of demand to a change in price of the commodity. Prof.

Alfred Marshall had introduced the concept of elasticity of demand in the
economic theory. In his words, “The elasticity (or responsiveness) of

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