The MBA Math Monday series helps prospective MBA students to self assess their proficiency with the quantitative building blocks of the MBA first year curriculum.
The market interaction of supply and demand is one of the classic business concepts that people encounter from school snack swaps to shopping at the mall, from start ups to too-big-too-fail banks, and from subprime real estate to U.S. Treasury bond auctions.
The concepts can be used qualitatively and quantitatively. Like much in economics, supply and demand can be introduced equivalently in pictures or with equations.
Here, we use equations for a situation involving a perishable agricultural commodity market.
Assume that the demand curve D(p) given below is the market demand for apples:
Q = D(p) = 270 – 15p, p > 0
Let the market supply of apples be given by:
Q = S(p) = 42 + 15p, p > 0
where p is the price (in dollars) and Q is the quantity. The functions D(p) and S(p) give the number of bushels (in thousands) demanded and supplied.
What is the consumer surplus at the equilibrium price and quantity?
Solution (with audio commentary): click here