Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:
`q^(D)=700-p`
`q^(S)=500+3p " for "pge15`
`=0 " for " 0 leplt15`
Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than rupee 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?

Explanation

From the given supply curve, it can be concluded that rupee 15 must be the minimum average variable cost (AVG) of producing commodity X. In a perfectly competitive market, firms do not produce positive level of output for any price less than AVG as they will be at loss if they supply at a price less than AVC. So, firms will not be interested in producing commodity X at any price less than rupee 15. Calculation of Equilibrium Price and Equilibrium Quantity
`"At equilibrium",q^(D)=q^(S)`
`It " means "700-p=500+3p`
`4p=200`
p or Equilibrium Price = rupee 50.
Putting the value of equilibrium price in the equation of demand curve:
`q^(D)` or Equilibrium Quantity = 700 - 50 = 650 units.