Session 3

Session 3
Supply and Market Equilibrium

Recap
• Apple Watch Case:
• How to analyze a product’s demand?
• Qualitative aspect of understanding the demand
• Quantitative aspect of understanding the demand
What is Supply?
• It represents how much of a product will be supplied in the market.
• Just like consumers, producers also assign a value to the product.

From producers’ perspective, that value is the minimum value that
they will be willing to accept to provide the product in the market.
• Willingness of supplying the product is not sufficient, the supplier

should also have resources and definite plan of supplying the product
in the market.
3
Supply Definition
If a firm supplies a good or service, then the firm
1. Want to produce it (Can profit from producing it)
2. Has the resources and the technology to produce it,
3. Has made a definite plan to produce and sell it.
•Resources and technology determine what it is possible to produce.

Supply reflects a decision about which technologically feasible items
to produce.
•The quantity supplied of a good or service is the amount that

producers plan to sell during a given time period at a particular price.
Supply Function
• 𝑄𝑠 = 𝑓 𝑃, 𝑃𝐼 , 𝑇𝑒𝑐ℎ, 𝐺, 𝑁, 𝑃𝑠 , 𝑇, 𝐸
• Supply function provides a relation between quantity supplied and all

factors that could impact supply, e.g. Price of the product (P), Input
price (𝑃𝐼 ), production technology (Tech), government regulations (G),
Number of Firms (N), Substitutes in production (𝑃𝑠 ), Taxes (T),
Producers Expectation (E) and so on.
5
Supply Curve
• A relation between Price and Quantity supplied, keeping all other
factors impacting supply fixed at some level (constant). A rise in
the price of a product, other things remaining the same, brings an
increase in the quantity supplied.
• Plotting a linear supply curve
Let positive relation between Price (𝑃) and quantity supplied (𝑄𝑠 ) is given
P
as follows:
𝑄𝑠 = 𝑐 𝑃 − d
In terms of P (inverse supply function):
1 𝑑
𝑃 = 𝑄𝑠 +
𝑐 𝑐
Y-intercept (Along Price axis) = 𝑑/𝑐

X-intercept (along Quantity axis) = −𝑑 d/c
−𝑑 represents the quantity supplied when price is zero.
1
Slope = Q
𝑐 Figure 3 6
The Law of Supply
• Law of Supply: the higher the price of a good, the larger the
quantity firms want to produce
Movement along Supply curve
• A rise in the price, other things remaining the same, brings an
increase in the quantity supplied and a movement up along the
supply curve.
• A fall in the price, other things remaining the same, brings a decrease
in the quantity supplied and a movement down the supply curve.
8
Movement along Supply Curve
Let’s continue with our initial linear inverse supply
curve: P
1 𝑑
𝑃 = 𝑄𝑠 +
𝑐 𝑐
If Price of a good (product or service) increases, the
point will move up the supply curve (along orange B
line). Quantity supplied will increase (represented by
point B). If Price of a good decreases, the point will
move down the supply curve (along orange line). A
Quantity supplied will decrease (represented by point
A). d/c
Change in price will result in movement along the a Q

Supply curve. Figure 2
Factors effecting Supply
▪ Price of the product (P)
▪ Input price (𝑃𝐼 )
▪ Production Technology (Tech)
▪ Government regulations (G; taxes or subsidies for production)
▪ Number of Firms (N)
▪ Substitutes in production (𝑃𝑠 )
▪ Producers Expectation (E)
Change in Supply
•When some influence on selling plans other than the price of the good
changes, there is a change in supply of that good.
•The quantity of the goods that producers plan to sell changes at each and
every price, so there is a new supply curve.
•When supply increases, the supply curve shifts rightward (downward

shift).
•When supply decreases, the supply curve shifts leftward (upward shift).
• Shift in the supply curve:

• reflects a change in the state of technological knowledge or the conditions
of supply of inputs
• Rightward shift: increase in supply
• Leftward shift: decrease in supply
Increase in supply
Let’s continue with our initial linear inverse supply
curve: P
1 𝑑
𝑃 = 𝑄𝑠 +
𝑐 𝑐
If the price remains the same but one of the other factors B
influencing supply changes, supply also changes and the
supply curve shifts.
Factors resulting in an increase in supply will shift the

supply curve upwards (curve representing point B) and d/c A
vice-versa. When supply reduces, suppliers want to supply
less Quantity at the same price, which is represented by
upward shift (or leftward shift). a Q
Figure 2
Notice that the P and Q intercepts are changing. However,
the slope remains unchanged in this case as well.
Problem:
• Assume a new technology is developed in the production of
calculators. Also assume that the profitability of calculators (relative
to computers) increases. What will happen to the supply and/or
quantity supplied of calculators if the technology takes place and at
the same time the profitability of calculators increases?
Problem:
• Suppose the government subsidizes the production of rice, an
ingredient used in the production of idly (certain people in the govt.
love idly). What will happen to the supply and/or quantity supplied
of idly if the price of rice increases and, at the same time, the subsidy
increases?
DETERMINATION OF EQUILIBRIUM PRICE AND
QUANTITY: MARKET EQUILIBRIUM
Prices
• Who determines the price in the market?
• Is it always the seller who determines the price at which the product
is sold?
• Do consumers have a role to play in the price prevailing in the

market?
Hula Hoop
Market Equilibrium
• Market equilibrium is determined at the intersection of the market
demand curve and the market supply curve
• Shortages put upward pressure on the price
• Surplus puts downward pressure on the price
• At equilibrium price there is no tendency to change the price

Disequilibrium
• Disequilibrium – a situation in which the quantity

demanded and the quantity supplied are not in
balance
• Shortage
• excess demand for a good: quantity demanded> quantity
supplied
• market forces tend to exert upward pressure on price
• Surplus
• excess supply of a good: quantity supplied> quantity demanded
• market forces tend to exert downward pressure on price
20
Market Equilibrium
Price Supply
Surplus
𝑃𝐻
𝑃𝑒
𝑃𝐿
Shortage
Demand
0 𝑄0 𝑄𝑒 𝑄1 280 Quantity
Market Equilibrium
𝑄𝐷 = 𝑎 − 𝑏𝑃
𝑄𝑆 = 𝑐 𝑃 − d
A competitive market equilibrium exists at a price,

𝑃 𝑒 , such that 𝑄𝑑 𝑃 𝑒 = 𝑄 𝑠 𝑃 𝑒 .
𝑎+𝑑
𝑃 𝑒𝑞 =
𝑏+𝑐
𝑎𝑐 − 𝑏𝑑
𝑄 𝑒𝑞 =
𝑏+𝑐
Market Equilibrium in Action
• Consider a market with demand and supply functions,
respectively, as
𝑄𝑑 = 10 − 2𝑃 and 𝑄 𝑠 = 2 + 2𝑃
𝑃𝑒 = 𝑅𝑠. 2
𝑄𝑒 = 6 units
Change in Demand with No Change in Supply
Change in Supply with No Change in Demand
Increase in Both Demand and Supply Decrease in Both Demand and Supply
Decrease in Demand and Increase in Increase in Demand and Decrease in
Supply Supply
NO CHANGE IN AN INCREASE IN A DECREASE IN
SUPPLY SUPPLY SUPPLY
NO CHANGE IN P SAME P DOWN P UP
DEMAND Q SAME Q UP Q DOWN
AN INCREASE IN P UP P AMBIGUOUS P UP
DEMAND Q UP Q UP Q AMBIGUOUS
A DECREASE IN P DOWN P DOWN P AMBIGUOUS

DEMAND Q DOWN Q AMBIGUOUS Q DOWN
Problem:
• Suppose that the cost of production of peanuts have increased. What
happens to the equilibrium quantity and price of peanut butter
because of increased cost?
Union Budget: What will happen to property
demand and supply?
Impact on Gold Supply and Demand and
equilibrium prices
• Union Budget 2024 proposed a cut in customs duty from 15% to 6%.
• What will happen to the silver price?

Session 3

Uploaded by

Copyright:

Available Formats

Session 3

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Session 3

Uploaded by

Copyright:

Available Formats

Session 3

Supply and Market Equilibrium

• Just like consumers, producers also assign a value to the product.

• Willingness of supplying the product is not sufficient, the supplier

•Resources and technology determine what it is possible to produce.

•The quantity supplied of a good or service is the amount that

• Supply function provides a relation between quantity supplied and all

Y-intercept (Along Price axis) = 𝑑/𝑐

Change in price will result in movement along the a Q

•When supply increases, the supply curve shifts rightward (downward

• Shift in the supply curve:

Factors resulting in an increase in supply will shift the

• Do consumers have a role to play in the price prevailing in the

• At equilibrium price there is no tendency to change the price

• Disequilibrium – a situation in which the quantity

A competitive market equilibrium exists at a price,

A DECREASE IN P DOWN P DOWN P AMBIGUOUS

• What will happen to the silver price?

You might also like