Demand, Supply and

equilibrium
Slides by Somrita Chakraborty
The law of supply states that there is a
direct relationship between the quantity
supplied and the price of a commodity. To
point out, this is a very qualitative
statement. However, markets for different
commodities differ in ways we can’t even
imagine. Interestingly, the concept of
elasticity of supply handles all this with
ease.

The law of supply

Supply is the amount producers are willing
to offer for sale at each possible price. The
amount sellers are willing to offer at a
particular price is called quantity supplied.
The supply schedule for pizza would be
constructed by adding up the quantities
that each producer offers for sale at each
price, holding constant everything else that
affects the supply of pizza.

Supply Curve
Supply curve
Equilibrium is a situation in
which there is no tendency
for change. A market will be
in equilibrium when there is
no reason for the market
price of the product to rise
or to fall. This occurs at the
price where quantity
demanded equals quantity
supplied. At this price, the
amount that consumers
wish to buy is exactly the
same as the amount that
producers wish to sell.

Equilibrium
Demand and supply curves
are simply graphs of
demand and supply
schedules. Equilibrium
occurs where the supply and
demand curves intersect at
an equilibrium price of $3
and an equilibrium quantity
bought and sold of 8. Excess
supply or excess demand at
any price is simply the
horizontal distance between
the supply and demand
curves.

Equilibrium of demand and supply

An increase in
demand means that
consumers wish to purchase
more of the good at every price
than before. Graphically, the
demand curve shifts up to the
right. As a result of an increase
in demand, the equilibrium
price rises as does the
equilibrium quantity bought
and sold. Notice that an
increase in demand has no
effect on the supply curve.
Firms do increase production,
but only in response to the
higher market price.

Shifts of the Demand Curve

A decrease in demand, on the
other hand, means that people
wish to purchase less of this good
at every price than before. The
demand curve shifts down to the
left. The equilibrium price and
quantity both decrease. Again,
the shift of the demand curve has
no effect on the supply curve.
From the point of view of
producers, all that has happened
is that the market price has
fallen. So, firms decrease the
quantity supplied. The supply
curve itself does not shift. A
movement along the supply
curve occurs.

Shifts of the demand curve

changes in
tastes/preferences

Things that shift the demand curve

changes in income
2. inferior goods
1.normal goods

Things that shift the demand curve

changes in the prices of related goods
1. substitutes 2. complements

Things that shift the demand curve

changes in expected changes in the population
future prices of potential buyers

Things that shift the demand curve

The elasticity of supply establishes a quantitative
relationship between the supply of a commodity and it’s
price. Hence, we can express the numeral change in
supply with the change in the price of a commodity using
the concept of elasticity. Note that elasticity can also be
calculated with respect to the other determinants of
supply.
However, the major factor controlling the supply of a
commodity is its price. Therefore, we generally talk about
the price elasticity of supply. The price elasticity of supply
is the ratio of the percentage change in the price to the
percentage change in quantity supplied of a commodity.

Elasticity of Supply
 Es= [(Δq/q)×100] ÷ [(Δp/p)×100]
= (Δq/q) ÷ (Δp/p)
Δq= The change in quantity supplied
q= The quantity supplied
Δp= The change in price
p= The price

Formula
The formula for The formula for
calculating the point calculating the arc-
elasticity of supply elasticity of supply
is: is:
Es= (dq/dp)×(p/ Es= [(q1 –
q) q2)/( q1 + q2)] ×
Here dq/dp is the [( p1 + p2)/(p1 –
slope of the supply p2)]
curve.

Elasticity from a Supply Curve

The price elasticity of
demand is measured
by its coefficient Ep.
This coefficient
Ep measures the
percentage change in
the quantity of a
commodity demanded
resulting from a given
percentage change in
its price: Thus

Methods of calculating elasticity:

(1) The Percentage Method:
Prof. Marshall devised a
geometrical method for
measuring elasticity at a point
on the demand curve. Let RS be
a straight line demand curve in
Figure 11.2. If the price falls
from PB(=OA) to MD(=OC). the
quantity demanded increases
from OB to OD. Elasticity at
point P on the RS demand curve
according to the formula is: Ep =
∆q/∆p x p/q
Where ∆ q represents changes in
quantity demanded, ∆p changes
in price level while p and q are
initial price and quantity levels.

(2) The Point Method:

With the help of the point
method, it is easy to point out
the elasticity at any point
along a demand curve.
Suppose that the straight line
demand curve DC in Figure
11.3 is 6 centimetres. Five
points L, M, N, P and Q are
taken oh this demand curve.
The elasticity of demand at
each point can be known with
the help of the above method.
Let point N be in the middle of
the demand curve. So
elasticity of demand at point.

Elasticity of demand along the

demand curve
We have studied the measurement of
elasticity at a point on a demand
curve. But when elasticity is measured
between two points on the same
demand curve, it is known as arc
elasticity. In the words of Prof.
Baumol, “Arc elasticity is a measure of
the average responsiveness to price
change exhibited by a demand curve
over some finite stretch of the curve.”
Any two points on a demand curve
make an arc. The area between P and
M on the DD curve in Figure 11.4 is an
arc which measures elasticity over a
certain range of price and quantities.
On any two points of a demand curve
the elasticity coefficients are likely to
be different depending upon the
method of computation.

(3) The Arc Method:

1. Relatively Greater- 2. Relatively Less-
Elastic Supply Elastic Supply
 When the change in  When the change in
supply is relatively more supply is relatively less
when compared to the when compared to the
change in price, we say change in price, we say
that the commodity has that the commodity has
a relatively greater- a relatively-less elastic
elastic supply. In such a supply. In such a case,
case, the price elasticity the price elasticity of
of supply assumes a supply assumes a value
value greater than 1. less than 1.

Types of elasticity of supply

(3) Unitary elastic
For a commodity with a unit elasticity of
supply, the change in quantity supplied of a
commodity is exactly equal to the change in
its price. In other words, the change in both
price and supply of the commodity are
proportionately equal to each other. To point
out, the elasticity of supply in such a case is
equal to one. Further, a unitary elastic supply
curve passes through the origin.

Types of elasticity of supply

4. Perfectly Elastic
supply
A commodity with a perfectly
elastic supply has an infinite
elasticity. In such a case the
supply becomes zero with even a
slight fall in the price and
becomes infinite with a slight rise
in price. This is indicative of the
fact that the suppliers of such a
commodity are willing to supply
any quantity of the commodity at
a higher price. A perfectly elastic
supply curve is a straight line
parallel to the X-axis.
Types of elasticity
5. Perfectly Inelastic
Supply
A service or commodity has a
perfectly inelastic supply if a
given quantity of it can be
supplied whatever might be the
price. The elasticity of supply
for such a service or commodity
is zero. A perfectly inelastic
supply curve is a straight line
parallel to the Y-axis. This is
representative of the fact that
the supply remains the same
irrespective of the price.
Graphical representation
When the price of a commodity
changes from Rs. 4 per unit to
Rs. 5 unit, its market supply rises
from 100 units to 120 units. Calculate
price elasticity of supply. Is supply
elastic? Give reason.

Problem