OS 3.5 APPLICATIONS oF UNEAR EQUATIONS In alm. . ; business. and eoamot Pics that involve application of linear equations in aaa ar cecromics, the term function will always be used to indieate quantity of goods ‘dem y values. The x variable represents any unit of and y variable ra; emanded or supplied, sold or produced, savings, ete. commodity, total presents any amount such as selling price per unit of , total revenue, total cost, profit or income, consumption, etc. In this chapter, we should always assume a linear equation for each 3.5.1 DEMAND FUNCTION In economics, the term demand refers to quantity of goods that a consumer would be willing and able to buy at various alternative prices during some specified period of time. Note that as the price goes down, consumers’ demand for the commodity goes up. As the price goes UP consumers’ demand goes down. This relationship that specified the amounta of a particular commodity that consumers are willing and able to buy at yarious price levels is called law of demand An existing relationship between the quantity demanded (x) and the unit price (y) of commodities is called demand function and an equation that summarizes the behavior of a demand function is formulated into a demand equetion. This equation can be written in the form y = f () or x = ely) a6 needed but students should remember that the quantity x of any commodity that will be purchased by consumers depends on the price y at which that commodity is made available. y ~ f(x) means price y is an expression in terms of quantity x whila x = g (y) means quantity x is an expression in terms of price y. This relationship can be illustrated graphically with linear or non-linear curves. However, in this . chapter we will assume that alt demand functions behave like a straight line. Based on the demand law the yelationship between price y and quantity demanded x is most often inverse, hence, the appropriate direction of a line for demand function 1s & decreasing line. In some special cases, a demand function may have a constant price at varying demand or constant demand at varying prices. These can be illustrated by horizontal . and vertical lines, respectively. The slope of a demand turve, therefore can be negative, zero oT undefined, as it ebeys the following properties (See Figure 3.1). .Ee ee 0©—_0_0—0—0_0_—0—0—0—0—0— i Demand Function Demand Line Slope Case 1, Negative As price increases, quantity Decreasing demanded decreased and as price decreases, quantity demanded increases. Case 2. Zero Price is constant regardless of Horizontal demand. i Case 3, Undefined Demand is constant regardless Vertical . of price. Hlustrations: : Negative Slope m=) Quantity demanded demanded Zero Slope i m=0 . . Undefined Sloped ™ = undefined Figure 3.3Example of Demand Function : A dealer can sell 40 shavers per day at 50.00 each, but he can sell 60 units if he charges 40.00 per item. a, Determine the demand equation, assuming it is linear. What is the highest price te be paid for this product? How many units would be demanded if the product were free? ~ How many shavers will be bought if the unit price is 80.007 e.. How much will be paid for each shaver if 57 units are demanded? f. Graph the equation. Let x the quantity demanded y the price per unit Given: [=] | 6 | P, (40,50) x,=40 Ly [eso | rao | Py (60, 40) xg = 60° yy = 40 Solution: a. Determine the demand equation Using the two point form formula to determine the demand equation y-¥1, x-Xy za 50 _ x- 40 xo 80, x—- 40 y~ 50 _ a- 40 yo> Yu ag- 21 40-50 60-40 -10 20 at 2a 2(y ~ 60) = -(x ~ 40) 2y — 100 =x + 40 2y+x-100- 40-0 - * + 2y — 140 = 0, demand equation ' What is the highest price to be paid for this commodity? First find the y-intercept by setting x equal to Zero, x4 2y-140=0;x=0 2y~+140=0 ¥y = 70, the highest price to be paid for the shaver How many units would be demanded if the shaver were free? This involves the x-intercept of the demand function, Set y equal to zero, then solve for x. . x+2y-140=0; y=0 xX + 2(0)- 140 =0 x-140=0 . x = 140 units, the quantity to be demanded if the shaver were free . . How many shavers will be bought if the unit price is ®80.00? None since the highest unit price is 70.00. How much will be paid for each shaver if 57 units are de- manded? This means solving for y when x = 57 x + 2y- 1400 : 57 + 2y- 140 =0 ay - §3 = 0 y = P41,50, unit price when demand is 57 unitsf. Graph the equation Use the intercept method of the graphing the equation Ox +y- 130 =0. Since we have already two points in the graph in the exercises, we can plot them in the plane. y (unit price in tens of peso) (57, 41.5)EE — ——————— 3.5.2 SUPPLY FUNCTION The term supply refers to quantity of goods that a producer would be willing and able to produce to make available for sale in the market at various alternative prices during some specified period of time. Note that as the price goes down, producers tend to ‘keep or reduce supplies of commodity. As the price goes up, quantity supplied goes up, too. this relationship between the quantity supplied (x) and price per unit (y) of the commodity is called daw of supply. The actual selling price of a product is determined by an interaction between potential consumers and the industry that produces it. At one case, an industry can consist of a large number of firms, no single one of which is able to significantly influence either the price of the product or the quantity offered for sale by the industry, At the other case, the industry can consist of a single firm having complete control over price and quantity supplied. Aa existing relationship specifying the amount of any commodity that manufacturers (or sellers) can make available in the market at various prices is called the supply function and an equation that summarizes the behavior of a supply function is formulated into a supply equation, Similarly, this equation can be written in the form y = f(xjorx =gy) as needed, The graph of a supply curve is either Jinear or non-linear. The simplest supply curve is the straight lide. The slope of a supply curve " ean be positive, zero of undefined as it obeys the following properties (See Figure 3.4): . : Slope Supply Function Supply Line Case 1. Positive As price increases, quantity Increasing : supplied also increases and as price decreases, quantity supplied also decreases. Case 2. Zero Price is constant regardless of Horizontal Oo supply. Case 3. Undefined Supply is constant regardless of Vertical price.Iustration: Supply Curve y (Price) L Positive Slope my = (+) x (Quantity) Either Supply or Demand y (Price) Zero Slope L med x (Quantity) Either Supply or Demand y (Price) L ° (Quantity) “Undefined Slope (a m = undefined _ Figure 3.4ST C13} Example of Supply Function At a price of P6,500 per cellphone, a cellphone company will supply 2,000 units per month, at a price of 7,500 per cellphone the company will supply 2,500 units per month. a, Determine the supply equation, assuming it te be linear. b. Ho many cellphones would be supplied if the unit price is 38,0007 c. Find the lowest price at which this product would be supplied? d. Graph the equation Taking the quantity x supplied as the x-coordinate and the price y per unit as the y-coordinate, the two points or the supply function have coordinates x; = 2,000, y; = 6,500, x, = 2,500, yy = 7,500 Since the supply equation is linear, using the two point form formula in finding the equation of a line passing through (2,000, 6,500) and (2,500, 7,500). - yr ¥) . ¥2- 1 K-%y XQ- 81 y= 6500 _ 7,500 6,500 x— 2000 ~ 2,500— 2,000 y= 6500 _ 1,000 x- 2,000 500 y- 6500 _, x— 2,000 . y — 6,500 = 2(x — 2,000) y -— 6,500 = 2x - 4,000 -2x + ¥ — 6,500 + 4,000 = @ {-2x + y — 2,500 = 0)-1 2x — y + 2,500 = 0, the supply equation |b. How many cellphones would b supplied if the unit price is 8,000? If y = *8,000, then solve for x using the equation an -y + 2,500 = 0 Ox ay + 2,500 =0 , 2x — 8,000 + 2,500 - 0 “2x - 5,500 = 6 6,500 2 x = 2,750 units, quantity supplied when the unit price is 8,000. Find the lowest price at which this produce would be supplied This involves the y-intercept, setting x equal to zero, then solve for y. 2x—y+2,500=90 2(0) —y + 2,500 = 0 =1(-y = -2,500) y = 2,500, the lowest price at which the product would be supplied Graph the equation. Use the intercepts method of graphing the equation | ox —¥ + 2,500 =0 Qx-y + 2,500=0 Lletx=0 Let y 20 20) - y + 2,500 & 0 2x- 0+ 2,500 = 0 _-l-y = -2,500) y = 2,600 (0, 2,500) . 1,250, 0) :¥ (unit frice in thoySand of pesos) <> 2x~ y+ 2,500 = 0 (0, 2,500) x (quantity in thousands of units) 3.5.3 MARKET EQUILIGRIUM A market is said to have reached its equilibrium point when, ats certain price per unit of commodity, the quantity demanded equals the quantity supplied and there are no internal forces to precipitate change. Graphically, market equilibrium point MEP (x, ya) refers to the point of intersection of the demand and supply curves, that is, where the buying intentions of consumers are consistent with the selling intention? of the sellers. In the figure below, you will find two shaded areas that deseribe tw? economic conditions based om the reactions of consumers and suppliers towards various prices per unit of @ commodity. The shaded area above the market equilibrium point illustrates that a certain price level, 72 corresponding units supplied is greater than corresponding units demanded (yp > ¥,); hence, surplus of goods occur. At this condition, suppliers 5 te from a real loss because ‘of too much supply of goods and not being ® to sell them all because consumers waived their demand for these Cont due to high price. On the other hand, the shaded area below the mar! uffer ods -equilibrium point illustrates that a certain price level, yy corresponding . units supplied is less than corresponding units demanded, (y, < ¥3) hence, shortage of goods occur. At this condition, suppliers suifer from an opportunity loss because of unavailability of supply of goods when mere consumers demanded for it, To balance the situation, the industry itself makes some adjustments by reducing or increasing the aggregate price of goods sold until an equilibrium is attained. y Figure 3.5 Supply Price Demand XA cg 0B XD Quantity Algebraically, the market equilibrium point (MEP) can be obtained by solving the demand and supply equations simultaneously Example: The supply and demand equation for a certain product are dz — 200y + 1600= 0 and 4x + 100y — 1700 = 0, respectively, where y represents the price per unit in pesos and x represents the number of units, Determine the market equilibrium quantity and price algebraically and find the market equilibrium point graphically.Solution: The supply and demand equations can be solved simultaneously by subtracting the firat from the second to give S00y = 3,300 = 0 300 y = 3,300 yeu Thus, the market equilibrium price is #11. ‘The market equilibrium quantity can be obtained by substituting y=11 in either the demand or supply equation using the demand equation 4x + 100y - 1,700 = 0 4x + 100(11) — 1,700 = 0 4x + 1,100 - 1,700 = 0 dx = 600 x = 150 Hence, 150 units will be supplied and demanded when the market is in equilibrium or when the price is F11. This is shown graphically below. ¥ Price 20 10 100 150 Quantity———————————_—_—_— 3.5.4 THE COST FUNCTION There are two types of costs involved in the production of any commodity by the firm; there are known ag the fixed costs and the variable costs. The fixed costs are costs to bo met whether production take place or not. That is they do not depend on the level of production. Examples of fixed costs are rents, interests or loans, bonds, administrative salaries, property taxes, utilities, and ingurance. The fixed cost line is parallel to the x- axis and the y-intercept equal to the fixed cost with slope equal to zero. The fixed cost line is given by y=FC. Variable costs are costs that depend on the level of production, that is, on the amount of the commodity produced. The total variable cost are proportional to the amount of commodity produced when the variable cost per unit of commodity is constant. Material cost and labor cost and all other costa directly related to the production procesa of commodity are examples of variable cost. ° . If m pesos denotes the variable cost per unit, then the total variable costs of producing x units of commodity is mx pesos. If the fixed cost are b pesos, then the total cost in pesos of praducing x units is given by Total Cost = Total Variable Cost + Fixed Costs Cie mx+b C(x) = mx + bis ag example of a cost function. The graph of the equation is a straight line whose slopes upward to the right (m > 0) which represents the variable cost per unit and y-intercept represents the fixed cost. Example: +. The veriable cost of processing one kilo of boneless bangus ia 50.00 and the fixed cost per day ia ®500. Determine the cost equation and draw its graph. Find the cost of processing 50 kilos of boneless bangus per day. . Using the cost function, we have C (x) = mx + b where m is the variable cost per unit and b the fixed cost. .———————e—eeeorrnn a, Given: variable cost/kilo = 750.00 fixed cost/day = 7500.00 Solution: C(x) = mx + b C(x) = 50 x + 500, the tota) cost function thod to graph the function Using the intercepts me’ Cod = 50e+ 500 Let x = 0 Let C(x) = 0 C(x} = 50(0) + 500 9 = 50 x + 500 Cox) = 500 7500 " 50 (0, 600) ~10 (-10, 0) yin hundred of pesos) (0, 600) (0, 500) ' Clx) = 5% + 500 x (in tens of units)b. Find the cost of processing 50 kilos of boneless bangus per day. Using the function C(x} = 50x + 500 and setting x = 50, then solve for C(x). Clix) = 50x + 500 = 50(50) + 500 = 2,500 + 500 ‘ C(x) = P 3,000.00, the cost of processing 50 kilos of bangus per day. 3.5.5 BREAK EVEN ANALYSIS If the total revenue R(z) obtained from sales is less than the total cost Cx) of production, then a business is at loss. On the other hand, jf the total revenue is greater than the total cost, there is a profit. However, if the cost of production just equal to the revenue obtained from sales, there is no profit or loss, so business breaks even, The number of units produced and sold in this case is called break even paint. The break even quantity and revenue corresponds to the x and y-coordinates of the Break Even Chart Rix) Cx) Figure 3.6i gt equations. The total revenye pon ty intersection fOr origin (0, 0) which implies that Hise 0 ET o revenue or income. The total revenue in pesos of . by R(x) = (Selling price per unit) x. Rix) = Cis} and solve for tion R(x) = (SP) x. Profit C(x). Another method of ion. by letting P {x) no sales means NO selling x units is given Ive for the break even quantity let x white the break even revenue use the equal Jinction is given by the equation P(x) = Rox) — solving the break even point is to use the profit funct equal to zero and solve for the break even quantity. Example: JP Company's daily total cost (in pesos) of producing x items is given by the equation o(x) = Sx + 600, (a) If each item sells for #10, what is the break even point? (b) If the selling price increased to P20 per item, whatis the new break aven point? (c) If it is known that 200 items can be sold each day, what price should be changed to guarantee no loss? (d) Find the profit at a sale of 250 items. (e) Graph the C(x) and R(x) and identify the BEP. a. Given: C(x) = 5x + 600 Ria) = 10x Solution: Rix} = C(x) 10x = Sx + 600 1% — 5x = 600 x = 120 itema, Break Even Quantity Solve for the Break Even Revenue Rix) = 10x . = 10120) RO) = P 1,200 Thorefore the BEP (120, 1,200)it 3.6 CONSUMPTION AND SAVINGS FUNCTIONS Linear equation may also be applied to income and con: i functions. National Income is composed of two parts: Consumption and Savings. Consumption refers to the expenditures on goods and services, ‘It is assumed that what is not consumed is being saved. It is therefore assumed that what is saved goes Lo investment. The following equations show the relationship of national income, consumption, and savings, 1 K2C4+s 2 Cex-§ 3% S=xX-c where X = national income C = consumption S = savings Example: ; The consumption functions is given by the equation C=95 + 2 x, where C is the consumption and x is the national income both measured in billion pesos. a. How much is the consumption when income is ®850 billion? b. Set up the saving function in terms of income. How much is the amount saved when income is #850 billion? d, What should be the national incomé in order to save P85 a. c= 95+ 3x Find C if x = 850 billion C295 + = 1950) a a oo. C = F605 billionee) Set up the Saving function since savings function is S=K—¢ substitute the value of C in the equation C = 95 + 8, . 50 S=k%-c (#1854 gy S=x-95- 2x 2 S= Bt 95 To find the amount saved (S) when income is F850 billion, substitute 850 billion in X. 2 Ss 5x- 95 2 = 5 (850) — 95 S$ = P245 billion Find x when § = 85 Billion. 2 = 2k-95 a5 = 22-95 2x 2 85 + 95 2 x = 450 billion The national income should be 450° billion to save #85 billion.