All about Supply and Market Equilibrium

1. All about Supply
&
Market Equilibrium
Prepared By
Mohammed Jasir PV
Asst. Professor
MIIMS, Puthanangadi
Contact: 9605 693 266

3. Supply
• Supply of a commodity refers to various quantities of a commodity that the
producers are willing to sell at different possible prices at a point of time.
• The total amount of a product (good or service) available for purchase at
any specified price

4. Supply (SS)
• Quantity supplied is different from supply, as quantity supplied refers
to a specific quantity of a commodity that the producers are ready to
sell at a specific price.

5. Determinants of supply
• Price of the product
• Price of related Commodity
• Number of Firms in Industry
• Goal of the firm
• Expectations
• Price of Factors of Production
• Technology Level
• Business Expectation
• Govt Policy
• Taxes And Subsidies
• Natural Factors

6. • Good’s own price: An increase in price will induce an increase in the quantity
supplied.
• Prices of related goods: For purposes of supply analysis, related goods refer to
goods from which inputs are derived to be used in the production of the primary
good.
• Conditions of production: The most significant factor here is the state of
technology. If there is a technological advancement related to the production of the
good, the supply increases.
• Expectations: Sellers’ expectations concerning future market conditions can directly
affect supply.

7. • Price of inputs: If the price of inputs increases the supply curve will shift left as
sellers are less willing or able to sell goods at any given price. Inputs include land,
labor, energy and raw materials.
• Number of suppliers: As more firms enter the industry the market supply curve will
shift out driving down prices. The market supply curve is the horizontal summation
of the individual supply curves.
• Government policies and regulations: Government intervention can take many
forms including environmental and health regulations, hour and wage laws, taxes,
electrical and natural gas rates and zoning and land use regulations. These
regulations can affect a good’s supply.

9. Law of supply
• The quantity supplied of a commodity is directly related to the price of
the commodity, other thing remains same.
• In other words , the quantity offered for sale varies directly with price
that is higher the price, larger is the supply and vice-versa.

10. Exceptions to the law of supply
• Monopoly
• Competition
• Perishable goods
• Legislation restricting quantity (legal restrictions)
• Agricultural products

11. Individual supply relates to the supply of a good or service by one firm at
different prices, other things remains constant or equal.
Market supply is the sum of the amount of good supplied for sale by all the
firms or producers in the market at different prices during a given time.
Individual supply and market supply

12. Ways of expressing supply
• Supply Function
• Supply Schedule
– Individual and Market SS Schedule
• Supply Curve
– Individual and Market SS Schedule

13. Ways of expressing supply
• Supply function:
– A supply function of an individual supplier is an algebraic form of
expressing his behavior with regard to what he offers in market at
the prevailing prices.
– Supply function explain the relationship between the supply of a
commodity and its determinant.

14. Supply Function
Sx= f (Px,Pr,Nf,G,Pf,T,Ex,Gp)
Supply of X is the Function of
– Price of Commodity,
– Price of related Commodity,
– Number of Firms in industry,
– Goal of the firm,
– Price of Factors of Production,
– Technology for production,
– Business Expectation and Govt Policy

15. Supply Schedule
Price of the Product Quantity Supplied
3 1
6 5
9 10
12 15
• A supply schedule is a table that shows the relationship between the price
of a good and the quantity supplied
• It can represented graphically as a supply curve.

16. Price of the
Product
Supply by
Firm A
Supply by
Firm B
Supply by
Firm C
Market
Supply
3 0 2 0 2
6 5 6 5 16
9 10 8 9 27
12 15 13 17 45
Price of the
Product
Quantity
Supplied
(Firm A)
3 0
6 5
9 10
12 15
Individual supply Schedule Market Supply Schedule
Supply Schedule

17. Supply Curve
The supply curve is a graphical depiction of
the supply schedule that illustrates that
relationship between the price of a good
and the quantity supplied.

18. Supply curve
• Its a graphic representation of the relationship between product price and
quantity of product that a seller is willing and able to supply.
• Product price is measured on the vertical axis of the graph and quantity of
product supplied on the horizontal axis

19. Price of the
Product
Quantity Supplied
3 0
6 5
9 10
12 15
Supply Schedule
In simple its a graphical representation of law of supply or graphical
representation of supply schedule
Supply Curve

21. Market Supply

22. Changes In Supply
Changes in determinants of supply will make a change in supply
• Price of the product
• Price of related Commodity
• Number of Firms in Industry
• Goal of the firm
• Expectations
• Price of Factors of Production
• Technology Level
• Business Expectation
• Govt Policy
• Taxes And Subsidies
• Natural Factors
Expansion and Contraction in Supply
Increase and Decrease in Supply

23. Changes In Supply
Expansion and Contraction in
Supply
Increase and Decrease in
Supply
Change in Supply
due to
Change in price of
commodity
Change in factors
other than price

24. Expansion and Contraction in Supply
The increases in quantity supplied due to the
rise in price, its called expansion.
The Decreases in quantity supplied due to the
fall in price, its called Contraction.

25. Changes In Supply
Expansion and Contraction in
Supply
Increase and Decrease in
Supply
Change in Supply
due to
Change in price of
commodity
Change in factors
other than price

26. Increase and Decrease in Supply
• Change in supply due to change in any determinants other than price
• Instead of movements in one supply curve.
• Its forming a new supply curve

27. Price
Quantity Supplied
10
S S2S1 Decrease in
Supply
105 15

28. Increase and Decrease in Supply
Decrease in SupplyIncrease in Supply
Price
Price
Quantity Supplied Quantity Supplied

29. Decrease in Supply
Increase in Supply

30. Reason for increase in supply
1. Improvement in technology
2. Fall on price of other commodities
3. Fall in price of factors of production
4. Weather
5. Expectations
Reason for decrease in supply
1. Deterioration of technology
2. Rise in price of factors of production
3. Rise in price of other commodities
4. Change in goals of production
5. Taxation

31. Elasticity of Supply

32. Elasticity of supply
It is defined as a percentage change in the quantity supplied of a product
divided by the percentage change in price.
Elasticity of supply measures the degree of responsiveness of quantity
supplied to a change in own price of the commodity.

33. Degree Or Kinds of Price Elasticity of Supply
• Perfectly elastic supply
• Perfectly inelastic supply
• Less elastic supply
• More elastic supply
• Unitary elastic supply

34. Perfectly Elastic Supply
The supply is said to be perfectly elastic when a insignificant change in
price leads to an infinite change in quantity supplied.
• A very small fall in price causes supply to rise infinitely.
• In this case elasticity of supply may equal to infinity

35. 2. Perfectly inelastic supply
• When a change in price produces no change in the quantity supplied of a
commodity.
• In this case quantity supplied remains constant regardless of change in price.
• In this case elasticity of supply is equal to zero
Elasticity of Supply = 0

36. Greater change in price leads to smaller change in quantity supplied. In
this case elasticity of supply is less than one.
Price
Quantity
Less Elastic Supply
Elasticity of Supply = <1
Less Elastic Supply

37. Q
P 1
• When a small change in price causes a greater change in quantity supplied.
• Percentage change in price of a commodity causes more than percentage
change in quantity supplied.
More Elastic Supply
Elasticity of Supply = >1
P
Q1
More Elastic Supply

38. • When a change in price results in exactly the same percentage change in
quantity supplied of a commodity.
• In this case percentage change in both the price and quantity supplied is the
same.
Unitary Elastic Supply
Elasticity of Supply = 1
Unitary Elastic Supply

40. Unitary Elastic Supply
Perfectly Elastic Supply
Perfectly Inelastic Supply
More elastic Supply
Less elastic Supply
Quantity Supplied
Price

42. Market Equilibrium
• It is a situation in which demand for a product is equal to its supply at
particular price.
• It means DDx = SSx
• No excess demand and No Excess Supply
• The price which prevails at a situation is called Equilibrium Price.
• The quantity of product at equilibrium price is called Equilibrium Quantity.

43. Price
Quantity Demand and Supply
10
105 15
5
15
20
20 25 30 35 40
25
30
Equilibrium Point
(DD=SS)
Excess Supply
(SS>DD)
Excess Demand
(DD>SS)
D
D
S
S

44. Market Equilibrium
Equilibrium Quantity
Equilibrium Point
EquilibriumPrice

45. Equilibrium price and Quantity
• Equilibrium price of a commodity is the price at which demand equals supply
• That is at a given price, same quantity is demanded and supplied.
• This quantity is called equilibrium quantity.
Per unit
price (Rs)
Quantity
demanded
Quantity
supplied
Description
10 3000 2000 Excess demand
20 5000 7000 Excess supply
30 6000 6000 Demand=supply

46. Changes in Demand or Demand Curve

47. CHANGES IN DEMAND
• Demand of one commodity never be the same for all time, it will change
according to some changes in its determinants
• May be due to change in price or due to factors other than price of the
commodity
• Change in determinants of demand creates change in demand.
• Mainly two type
1. Expansion And Contraction Of Demand
2. Increase And Decrease In Demand

48. Changes In Demand Curve
Changes in determinants of Demand will make a change in Demand
• Price of the product
• All other determinants
Expansion and Contraction in Supply
Increase and Decrease in Supply

49. Changes In Demand
Expansion and Contraction in
Demand
Increase and Decrease in
Demand
Change in
Demand
due to
Change in price of
commodity
Change in factors
other than price

50. 1. Expansion And Contraction Of Demand
• Expansion And Contraction Of Demand is the
situation when the demand change due to change in
price when other determinants remain the same.
• Change in Demand (Increase or Decrease)
• Due to Change in price (Rise or Fall)
• Other things remain same (No change in
Determinants of DD)

51. Expansion
Contraction
If the quantity demanded increases due
to the fall in price, its called
expansion.
Price Demand
If the quantity demanded decreases
due to the rise in price, its called
Contraction
Price Demand

52. Expansion and contraction can be explain in a single demand
curve
Price Demand
Price Demand

53. Price
Quantity Demand
10 D
D1
D2
105 15
D D2D1
2. Increase And Decrease In Demand

54. 2. Increase And Decrease In Demand
• Increase And Decrease In Demand is the situation when
the demand change due to change determinants (other
than price) of DD when price remain the same.
• Change in Demand (Increase or Decrease)
• Due to Change in Determinants of DD
• Price remain same (No change in Price)

55. Increase or Forward Shift In
DD Curve
Decrease or Backward Shift
In DD Curve
If the quantity demanded increases due to the
change determinants of DD (other than price).
If the quantity demanded decreases due to the
change determinants of DD (other than price).

56. Increase or Forward Shift In DD Curve

57. Decrease or Backward Shift In DD Curve