Economics for Business

Business School
University of Hertfordshire
Supply and Market
Equilibrium

Begg Chapter 4
Learning Outcomes

 The supply curve

 The concept of market equilibrium

 How changes in demand and supply lead

to changes in the market equilibrium

 Market shortages and surpluses as

instances of market disequilibria
Business Problem

e.g.
 How will the market price be next year?

 How will sales change over the coming year?

Introducing Supply

 Recall, a demand curve illustrated consumers’

willingness to demand at particular prices.

 A supply curve illustrates firms’ willingness to supply at

particular prices
Firm and Market Supply
 Figure 4.1 Firm A

Price
Qs
Firm B
£10
Price
Qs
£10

£5

£5
Quantity

1000 2000
Quantity

1500 3000
Industry
Price
Qs
£10

£5

Quantity

2500 5000
Shifts in Supply

 A change in the number of firms

 A change in the price of a factor input

 A change in productive technology

 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D SURPLUS d
80
(330 000)
Price (pence per kg)

Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b SHORTAGE B
40
(300 000)
a A
20

Demand
0
0 100 200 300 400 500 600 700 800
Quantity (tonnes: 000s)
 The determination of market equilibrium
(potatoes: monthly)

E e
100
Supply
D d
80
Price (pence per kg)

60

b B
40

a A
20

Demand
0
0 100 200 300 Qe 400 500 600 700 800
Quantity (tonnes: 000s)
Effect of a shift in the demand curve
P
S

g
Pe1

D2

D1
O Qe1 Q
Effect of a shift in the demand curve
P
S

i
Pe2

g h
Pe1

D2

D1
O Qe1 Qe2 Q
Effect of a shift in the supply curve
P
S2

S1

g
Pe1

D
O Qe1 Q
Effect of a shift in the supply curve
P
S2

S1

k
Pe3

j g
Pe1

D
O Qe3 Qe1 Q
Price floors/ceiling
 Comments on the Equilibrium

 The equilibrium is unique

 Priceswhere demand does not equal supply

are known as points of disequilibria

 Markets forces should push markets from

disequilibrium towards equilibrium
Summary
 You have been introduced to:
 Supply curve
 The determinants of supply
 The market equilibrium
 Changes in the supply vs movements along the curve
Market shortages and surpluses as instances of
market disequilibria
 The End!
Lecture 3: Elasticity
Read BEGG 3rd ed
ch.2.4-2.6 and ch. 4.3