SESSION 4: DEMAND AND

SUPPLY EQULIBRIUM
 A RECAP

• Demand, Supply
• Law of Demand, Law of Supply
• Factor shifting the demand curve and the supply curve
 MARKET MECHANISM: EQUILIBRIUM

P Equilibrium condition:
₹$6.00 D S P has reached
₹$5.00 the level where
quantity supplied equals
₹$4.00
quantity demanded
₹$3.00
𝑄𝐷 = 𝑄𝑆
₹$2.00

₹$1.00

₹$0.00 Q
0 5 10 15 20 25 30 35
 EQUILIBRIUM PRICE AND EQUILIBRIUM QUANTITY:
Equilibrium Price: the price that equates quantity supplied with quantity demanded
Equilibrium Quantity : quantity at which demand, and supply are equal
P
₹$6.00 D S
P 𝑸𝑫 𝑸𝑺
₹$5.00
₹0 24 0
₹$4.00 1 21 5
₹ $3.00 2 18 10
3 15 15
₹ $2.00
4 12 20
₹ $1.00
5 9 25
₹$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
 SURPLUS (EXCESS SUPPLY):
when quantity supplied is greater than quantity demanded

P Example:
₹
$6.00 D Surplus S If P = ₹ 5,
₹
$5.00 then
₹
$4.00 QD = 9 pizzas

₹
$3.00 and
QS = 25 pizzas
₹
$2.00
₹
resulting in a
$1.00
surplus of 16 pizzas
₹
$0.00 Q
0 5 10 15 20 25 30 35
 SURPLUS (EXCESS SUPPLY):
when quantity supplied is greater than quantity demanded

P Facing a surplus,
₹
$6.00 D Surplus S sellers try to increase
₹
$5.00 sales by cutting price.
₹
$4.00 This causes
𝑸𝑫 to rise and 𝑸𝑺 to fall…
₹
$3.00
₹
$2.00 …which reduces the
₹ surplus.
$1.00
₹
$0.00 Q
0 5 10 15 20 25 30 35
 SURPLUS (EXCESS SUPPLY):

when quantity supplied is greater than quantity demanded

P Facing a surplus,
₹
$6.00 D Surplus S
sellers try to increase
₹
$5.00 sales by cutting price.
₹
$4.00 This causes
₹
$3.00 QD to rise and QS to fall.
₹
$2.00 Prices continue to fall
until market reaches
₹
$1.00
equilibrium.
₹
$0.00 Q
0 5 10 15 20 25 30 35
 SHORTAGE (EXCESS DEMAND):
when quantity demanded is greater than quantity supplied

Example:
P
₹
$6.00 D S If P = ₹1,
₹
$5.00 then
₹
$4.00 𝑸𝑫 = 21 pizzas

₹
$3.00 and
𝑸𝑺 = 5 pizzas
₹
$2.00
resulting in a
₹
$1.00
shortage of 16
₹
$0.00 Shortage Q pizzas
0 5 10 15 20 25 30 35
 SHORTAGE (EXCESS DEMAND):
when quantity demanded is greater than quantity supplied

P Facing a shortage,
₹
$6.00 D S sellers raise the price,
₹
$5.00 causing QD to fall
₹
$4.00 and QS to rise,
₹
$3.00 …which reduces the
₹
shortage.
$2.00
₹
$1.00
Shortage
₹
$0.00 Q
0 5 10 15 20 25 30 35
 SHORTAGE (EXCESS DEMAND):

when quantity demanded is greater than quantity supplied

P Facing a shortage,
₹
$6.00 D S sellers raise the price,
causing QD to fall
₹
$5.00
and QS to rise.
₹
$4.00
Prices continue to rise
₹
$3.00 until market reaches
₹
$2.00 equilibrium.
₹
$1.00
Shortage
₹
$0.00 Q
0 5 10 15 20 25 30 35
 REVIEW QUESTIONS

2. Use supply and demand curves to illustrate how each of the following events would
affect the price of butter and the quantity of butter bought and sold:
a. An increase in the price of margarine
b. An increase in the price of milk
c. A decrease in average income levels
 CHAPTER 2- PROBLEM. 1

• Suppose the demand curve for a product is given by Q = 300 - 2P + 4I, where I is average income
measured in thousands of dollars. The supply curve is Q = 3P - 50.
a. If I = 25, find the market-clearing price and quantity for the product.
• Given I = 25, the demand curve becomes Q = 300 − 2P + 4(25), or Q = 400 − 2P. Set demand equal to supply
and solve for P and then Q:
• 400 - 2P = 3P - 50
P = 90
Q = 400 - 2(90) = 220.
 CHAPTER 2- PROBLEM. 1

• Suppose the demand curve for a product is given by Q = 300 - 2P + 4I, where I is average income
measured in thousands of dollars. The supply curve is Q = 3P - 50.
b. If I = 50, find the market-clearing price and quantity for the product.
Given I = 50, the demand curve becomes Q = 300 - 2P + 4(50), or Q = 500 - 2P. Setting demand equal to supply,
solve for P and then Q:
500 - 2P = 3P - 50
P = 110
Q = 500 - 2(110) = 280.