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%.