Course Code:19BMC102A

Course Title:Microeconomics

Course Leaders:
Sunita Chakraborty

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Lecture No. 2
Concept of Supply
Demand and Supply Equilibrium
Numericals related to Demand and Supply Equilibrium

At the end of this session, students will be able to:

– Describe the concept of supply
– Discuss the changes and shift in the supply curve
– Discuss the demand and supply equilibrium
– Solve numericals related to equilibrium output and
finding equilibrium price

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Supply

• Quantity supplied is the amount of a good that sellers are willing and able to sell

Law of Supply

– The law of supply states that, other things remaining equal, the quantity
supplied of a good rises when the price of the good rises

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 Th e Supply Schedule : The Relationship between
Price and Quantity Supplied
Supply Schedule
– The supply schedule is a table that shows the relationship between the price of
the good and the quantity supplied

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Relationship between Price and Quantity
SupplySupplied
Curve
– The supply curve is the graph of the relationship between the price of a good
and the quantity supplied
Price of
Ice-Cream
Cone
$3.00

2.50
1. An
increase
in price ... 2.00

1.50

1.00

0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
2....increases quantity of cones supplied. Ice-Cream Cones
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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Market Supply versus Individual Supply
• Market supply refers to the sum of all individual supplies for all sellers of a
particular good or service
• Graphically, individual supply curves are summed horizontally to obtain the market
supply curve

Shifts in the Supply Curve are caused by

• Change in price
• Change in quantity supplied
• Technology
• Expectations
• Number of sellers

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Change in Price
– Movement along the supply curve
– Caused by a change in anything that alters the quantity supplied at each price
Price of Ice-
Cream Cone S
C
$3.0
0 A rise in the price
of ice cream cones
results in a
movement along
A the supply curve.
1.00

Quantity of
Ice-Cream
0 1 5 Cones

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Exceptions to the Law of Demand

• Inferior goods / Giffen goods e.g. potatoes Vs meat

• Goods having prestige value e.g Rolls Royce car
• Price expectation i.e. Demand does not decrease or increase expecting
the price to rise or fall further respectively
• Fear of shortage i.e. hoarding and hence demand increases despite price
rise
• Change in income - If the consumers’ income increases, they will demand
more goods or services even at a higher price. On the other hand, they
will demand less quantity of goods or services even at lower price if there
is decrease in their income.
• Change in fashion - buying more of highly priced fashionable goods and
buying less of old-fashioned goods even at a discount.
• Basic necessities of life e.g. salt, rice, medicines

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Exceptions to the Law of Supply

• Price expectation of seller - If the seller expects that the price of

commodity is going to fall or rise in near future, he will try to sell more
even if the price level is very low or he will not sell more even if the price
level is high

• Stock clearance sale - heavy discount in price to promote more selling of

the products

• Fear of being out of fashion – low price , more sales

• Perishable goods are goods which have very short shelf-life and become
useless after that. Those goods must be made available in the market at
its right time whatever be its price. So the seller becomes ready to sell his
goods at any offered price.

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Equilibrium

• Equilibrium refers to a situation in which the price has reached the level where quantity supplied
equals quantity demanded

• Equilibrium Price
– The price that balances quantity supplied and quantity demanded
– On a graph, it is the price at which the supply and demand curves intersect

• Equilibrium Quantity
– The quantity supplied and the quantity demanded at the equilibrium price
– On a graph it is the quantity at which the supply and demand curves intersect

• Law of supply and demand

– The claim that the price of any good adjusts to bring the quantity supplied and the quantity
demanded for that good into balance

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Supply and Demand Together

Demand Schedule Supply Schedule

At $2.00, the quantity demanded is equal to the

quantity supplied!

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone Supply

Equilibrium price Equilibrium

$2.00

Equilibrium Demand
quantity

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Markets Not in Equilibrium - Surplus

• Surplus
– When price > equilibrium
price, then quantity supplied (a) Excess Supply
Price of
> quantity demanded. Ice-Cream Supply
• There is excess supply or a Cone Surplus

surplus $2.50

• Suppliers will lower the 2.00

price to increase sales,

thereby moving toward
equilibrium Demand

0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones

Copyright©2003 Southwestern/Thomson Learning

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Markets Not in Equilibrium - Shortage
(b) Excess Demand
• Shortage
Price of
– When price < Ice-Cream Supply
equilibrium price, then Cone
quantity demanded >
the quantity supplied
$2.00
• There is excess
demand or a 1.50
shortage Shortage

• Suppliers will raise Demand

the price due to too
many buyers chasing 0 4 7 10 Quantity of
too few goods, Quantity Quantity Ice-Cream
thereby moving supplied demanded Cones
toward equilibrium

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences
 Summary

• The supply schedule and supply curve and its dependence on price

• Changes in supply curve due to different market conditions

• Exceptions to the Laws of Supply and Demand

• The attainment of market equilibrium and the associated behavior of buyers and
sellers

• Numericals related to Demand and Supply equilibrium

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Faculty of Management and Commerce © Ramaiah University of Applied Sciences