Supply Analysis &

Market Equilibrium
BY: ANEELA CHATTHA
Introduction of Demand & Supply:

 A market is defined as a group of buyers and sellers of a particular product or

service.
 Competitive markets are markets with many buyers and sellers, so that each has a
very small influence on the price.
 Demand and supply is perhaps one of the most fundamental concepts of
economics and it is the backbone of a market economy.
 The demand for a product is the amount that buyers are willing and able to
purchase while, Quantity demanded is the demand at a particular price, and is
represented as the demand curve.
 The relationship between price and quantity demanded is known as the demand
relationship.
Law of Demand:

 The law of demand states that, if all other factors remain equal, the higher the
price of a good, the less people will demand that good and vice versa.
SUPPLY:

 Supply represents how much the market can offer.

 The supply of a product is the amount that producers are willing and able to bring
to the market for sale.
 Quantity supplied is the amount offered for sale at a particular price.
 The correlation between price and how much of a good or service is supplied to
the market is known as the supply relationship.
Law of Supply:

 Law of supply states that

If all other factors being equal, as the price of a good or service increases, the
quantity of goods or services offered by suppliers increases and vice versa.
Qs=f(P)
 This implies that price and quantity supplied are positively related.
 Producers supply more at a higher price because selling a higher quantity at a
higher price increases revenue.
Factors affecting Supply

 Price of the commodity – more is supplied at higher prices, less at lower prices.
 Prices of related goods –
 Substitutes - If price of tea falls, then demand for tea increases, but demand for coffee falls. So
supply of coffee falls.
 Complements in production -- good that is produced with other good – e.g. price of cars
decrease, demand and so supply of tires increases.
 Seller’s expectations:
Expect input prices to fall in future: increase supply today Expect price of good to rise in future:
decrease supply today
 Number of sellers is more, market supply increases
 Technology – new technology, new products, so Supply of old products falls.
 Prices of inputs – or cost of production increases e.g. wages, affects supply decreases.
Supply and Stock

 Stock is the amount of goods currently available for sale, regarded as inventories.
 Supply: is the amount of goods that sellers offer to sell at various prices,
Market Equilibrium:

Combining Supply and Demand

 When consumers buy goods and producers sell goods, their interaction lead to the
determination of an equilibrium price in the market.
Equilibrium price:
The price at which the quantity that sellers are willing to sell equals the quantity that
consumers are willing to purchase.
Market Not in Equilibrium:

Shortage (excess demand):

A situation in which the quantity demanded is greater than the quantity supplied. This
occurs when the price in the market is below the equilibrium price.
Surplus (excess supply):
A situation in which the quantity supplied is greater than the quantity demanded. This
occurs when the current price in the market is above the equilibrium price.
Why equilibrium is important?

 Equilibrium is the state in which market supply and demand balance each other,

and as a result prices become stable. Generally, an over-supply of goods or
services causes prices to go down, which results in higher demand—while an
under-supply or shortage causes prices to go up resulting in less demand.
Is Equilibrium good or bad?

 Equilibrium is a positive (as opposed to normative) economic concept. There is

nothing inherently good or bad about equilibrium. ... If the price of a good is
above equilibrium, this means that the quantity of the good supplied exceeds the
quantity of the good demanded. There is a surplus of the good on the market.
Thankyou