Basics of Supply & Market Equilibrium

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BASICS OF SUPPLY &

MARKET EQUILIBRIUM

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SUPPLY: Various quantities of commodities

which a seller is willing (& able) to sell at

different prices in a given market, at a point of 

time, other things remaining same

SUPPLY SCHEDULE: Tabular representation of 

data on quantity supplied & price of the good

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SUPPLY CURVE: curve showing relationship b/w

quantity supplied & price (direct relation)

QUANTITY SUPPLIED

PRICE 

X

YS

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DETERMINANTS OF SUPPLY 

• Price of commodity• Prices of related goods

• Prices of factors of production

• Objectives of producer • State of technology employed

• Future price expectations

•Imposition of taxes/ subsidies

• No of producers

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SUPPLY FUNCTION 

Sx = f (PX, P Y, PZ, PF, O, T)Where:

SX : Amount supplied of good X

PX : Price of good X

PY, PZ : Prices of other goods in market

PF : Prices of factors of production needed to

produce good X

O : Objective of producer T : State of technology used by producer  

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LAW OF SUPPLY 

Other things remaining same, more of a

commodity is supplied at a higher price &

less of it is supplied at a lower price

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CHANGE IN QUANTITY SUPPLIED

(MOVEMENT ALONG A CURVE) VERSUS

CHANGE IN SUPPLY (SHIFT OF CURVE)

MOVEMENT ALONG A SUPPLY CURVE:

change in quantity supplied due to a change in

its own price

SHIFT OF SUPPLY CURVE: change in supply

due to change in all other factors affecting

supply, other than the change in its own price

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CHANGE IN QUANTITY SUPPLIED-

CONTRACTION OF SUPPLY 

Quantity

Price

P1

Q1

P0

Q0

A decrease in

  price causes a

decrease in

quantity supplied.

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CHANGE IN QUANTITY SUPPLIED-

EXTENSION OF SUPPLY 

Quantity

Price

P0

Q0

P1

Q1

An increase in

  price causes an

increase in

quantity supplied.

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CHANGES IN SUPPLY 

Change in Production Technology

Change in Input Prices

Change in the Number of Sellers

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CHANGE IN SUPPLY- INCREASE IN

SUPPLY 

An increase in supplyrefers to a rightward

shift in the market

supply curve.

Quantity

Price

P0

Q1Q0

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CHANGE IN SUPPLY- DECREASE IN

SUPPLY 

Quantity

Price

P0

Q1 Q0

A decrease in supplyrefers to a leftward

shift in the market

supply curve.

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MARKET EQUILIBRIUM

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MARKET EQUILIBRIUM

Determined at the intersection of the marketdemand curve and the market supply curve

Associated price: Equilibrium price

Associated quantity: Equilibrium quantity

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MARKET EQUILIBRIUM

A market is inequilibrium

when price

adjusts so that

quantitydemanded

equals

quantity

supplied

Quantity

SupplyPrice

Equilibrium

 point 

Demand

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MARKET EQUILIBRIUM

E

Shortage

D

S

Q

PriceExcess

• If price is

greater thanequilibrium level

there will be a

surplus which

forces price down

•  If price is less

than equilibrium

level there will be

a shortage which

forces price up

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-400100500225

-200200400275

=Market

clears

300300325+200400200375

+400500100425

Pressure

on price

Surplus/

Shortage

Qty

Supplied

Qty

Demanded

Price (Rs)

MARKET EQUILIBRIUM

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IF PRICE IS TOO LOW…

Price

Quantity

S

D

5

6 12

Shortage12 - 6 = 6

67

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IF PRICE IS TOO HIGH…

Price

Quantity

S

D

9

14

Surplus

14 - 6 =8

6

8

8

7

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CHANGES IN MARKET EQUILIBRIUM

An increase in demand will

cause the market

equilibrium price and

quantity to increase.

Quantity

Price

P0

Q0

D0 S0

Q1

P1

D1

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CHANGES IN MARKET EQUILIBRIUM

A decrease in demand will

cause the market

equilibrium price and

quantity to decrease.

Quantity

Price

P1

Q1

S0

Q0

P0

D0D1

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CHANGES IN MARKET EQUILIBRIUM

A decrease in supply

will cause the

market equilibrium

price to increase and

quantity to decrease.

Quantity

Price

P1

Q1

D0

Q0

P0

S1 S0

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CHANGES IN MARKET EQUILIBRIUM

An increase insupply will cause the

market equilibrium

price to decrease and

quantity to increase.

Quantity

Price

P0

Q0

D0 S0

Q1

P1

S1

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AN INCREASE IN DEMAND COMBINED WITH AN

INCREASE IN SUPPLY

Initial Demand 

Supply 

Price

Quantity 0 

E1

P1

Q1 Q2 

New Demand 

New Supply 

E2 

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SIMULTANEOUS CHANGE IN THE

DEMAND AND THE SUPPLY 

If the increase or decrease in the demand and the supplyis of equal magnitude, then the price at old and new

equilibrium will remain equal

If the increase in the demand is of greater magnitudethan in supply, then the new equilibrium price will be

higher than the old equilibrium price, and vice versa

If the supply increases in greater proportion than thedemand, the new equilibrium price will be lower than the

old equilibrium price

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EXERCISE 1

Suppose the dd & ss curves for a given product have foll

eqs:

Qd = 1000- 10 P

Qs = -100 +10 P

At what Price will Qd = 0?

At what Price will Qd = 200?

Write the dd eq with Price as a function of Qd.

Determine the market eqm Price & Qty traded by buyers& sellers.

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EXERCISE 2

Complete the foll

table

Identify eqm P &Q

400500100

20020040080

30030060

-20020040

50010020

60000

Qs-QdQdQsPrice

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EXERCISE 3

Employ a dd curve to explain what wouldhappen to the dd for:

New cars, if consumer income increased

Cream, if coffee prices increased 400%.

DVD players, if price of video discs fell 50%.