Applying Systems of Linear Equations

to Market Equilibrium: Steps &

Example
Businesses use market equilibrium to determine price and sell products. Learn
how to use systems of linear equations to find market equilibrium in this video
lesson. Review what you know with a short quiz!
LINEAR MODELS AND LEMONS
Max is a lemonade millionaire with his
own lemonade stand company, Xtreme
Lemon. Max needs to understand
supply and demand so he can find
market
equilibrium. Market
equilibrium is when the amount of
product produced is equal to the
amount of quantity demanded. We can see equilibrium on a graph when the
supply function and the demand function intersect, like shown on this graph.
Max can then figure out how to price his new lemonade products based on
market equilibrium. Let's break this down one line at a time.
MARKET EQUILIBRIUM
This is the line of the supply function. On the graph, the y-axis represents the
price of a product, while the x-axis represents the quantity of the product. So
if we put a point at (10, 10) on this line, that would tell us that Max is willing
to supply 10 cups of lemonade if he can charge $10 for each cup. This is a
pretty fancy cup of lemonade if you ask me.
Let's say that Max has changed his mind and is now willing to supply 12.5
cups of lemonade, but only if the price of the lemonade is $5 per cup. He is
also willing to supply 30 cups of lemonade for $6.75 per cup. We can put that
information into two points on a graph like this: (12.5, 5) and (30, 6.75).
Now we have two points but no line. We need to write an equation to finish
this supply function. To do this, you need to know the slope formula, which
is m = (y2 - y1) / (x2 - x1), and the linear equation is y = mx + b.

FINDING THE SUPPLY FUNCTION

1. Find the slope: m = (y2 - y1) / (x2 - x1).
a. Plug in the numbers 12.5, 5, 30, and 6.75 and evaluate the
equation:
m = (6.75 - 5) / (30 - 12.5)
m = 1.75 / 17.5
m = 0.1
Okay, so for this equation we know that slope is 0.1, which is the same as a
10% increase in price.
Now, we need to find the y-intercept of the equation. We will use the pointslope form to find the y-intercept. We can use our smallest numbered point
(12.5, 5) and our slope, 0.1, to solve the equation, although you can use
which ever point you choose. Plug the numbers into the equation and
evaluate:
(y - 5) = 0.1(x - 12.5)
Use the distributive property.
y - 5 = 0.1x - 1.25
Add like terms.
y = 0.1x + 3.75
Now we know that the supply function for Max's Xtreme Lemon product is y =
0.1x + 3.75.
Basically, the 3.75 represents the overall cost of making the product
or the lowest price that the product can be supplied. Also, you would
normally replace the y with a p to indicate the price of the product and x with
a q to indicate the quantity of the product supplied. I left the y and x in while
we were working to prevent confusion, but you really need to get used to
seeing supply functions written like this: p = 0.1q + 3.75. It is also good to
note here that the slope of the supply function will always be positive.

FINDING THE DEMAND FUNCTION

Max conducts a survey to find the demand function for his consumer
audience. He finds that the consumers are willing to buy 60 cups of lemonade
if the lemonade is $4 a cup. They are also willing to pay $7 per cup of
lemonade, but they will only buy 30 cups. This makes sense because most

people are more likely to buy a lot of a product if it is less expensive. In fact,
the law of demand states the quantity demanded will increase as the price
of the product decreases. Try pausing the video and work the equations as we
go!
Let's use the slope formula first to figure out the rate of this equation. Plug
the numbers into the slope formula and evaluate. My points are (60, 4) and
(30, 7):
m = (y2 - y1) / (x2 - x1).
m = (7 - 4) / (30 - 60)
m = 3 / -30
m = -0.1