MARKET

EQUILIBRIUM
Submitted to Dr Debasmita Dutta

Prepared by :
Anshid MK – 22MBMB16
Fawaz Musthafa – 22MBMB20
Abhijith HM – 22MBMB30
Mohammed Rafid Abdulla – 22MBMB31
 Table of contents
01 02 03
Demand Supply Market
Equilibrium

04 05 06
Changes In Functions Conclusion
Equilibrium
Demand
Demand
Demand is the quantity of
a good that consumers are
willing and able to purchase at
various prices during a given
time.
Law Of Demand
In microeconomics, the law of demand is
a fundamental principle which states that
there is an inverse relationship between
price and quantity demanded. In other
words, "conditional on all else being equal,
as the price of a good increases , quantity
demanded will decrease ; conversely, as
the price of a good decreases , quantity
demanded will increase.
FACTORS AFFECTING DEMAND
Supply
Supply
Supply is a fundamental economic concept that
describes the total amount of a specific good or
service that is available to consumers. Supply can
relate to the amount available at a specific price
or the amount available across a range of prices if
displayed on a graph
Law of Supply
It shows a direct relationship between
price and quantity: quantities respond in
the same direction as price changes. This
means that producers are willing to offer
more of a product for sale on
the market at higher prices by increasing
production as a way of increasing profits
FACTORS AFFECTING SUPPLY

Price of
good

Price of
Firms
related
objectives
goods

Factors
affecting
Supply
Nature of Price of
competition inputs

Taxes and
technology
subsidies
Market
Equilibrium
Market Equilibrium
Market equilibrium is a market state
where the supply in the market is equal to
the demand in the market.
Equilibrium Price and Quantity
● When Quantity demanded is equal to
quantity supplied this is known as
Equilibrium Quantity.
● The price of the commodity when it is at
Equilibrium Quantity is known as
Equilibrium Price.
Surplus
When price of the good is higher than
equilibrium price, surplus of good takes
place.
Shortage
When price of the good is less than equilibrium
price, shortage of good takes place.
Changes in Equilibrium
 ANALYSING CHANGES IN THE
EQUILIBRIUM
• The equilibrium price and quantity depend on the position of the supply and demand curves.

• When some event shifts one of these curves, the equilibrium in the market changes, resulting in a new price and
a new quantity exchanged between buyers and sellers.

• When analyzing how some event affects the equilibrium in a market, we proceed in three steps.

• First, we decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves.

• Second, we decide whether the curve shifts to the right or to the left.

• Third, we use the supply-and-demand diagram to compare the initial and the new equilibrium, which shows how
the shift affects the equilibrium price and quantity.
EXAMPLE
S
A Change in Market Equilibrium Due to a Shift in Demand
Suppose that one summer the weather is very hot. How does this event affect the market for ice cream? To
answer this question, let us follow our three steps.

1. The hot weather affects the demand curve by changing people’s taste for ice cream.

2. Because hot weather makes people want to eat more ice cream, the demand curve shifts to the right.

3. At the old price of $2, there is now an excess demand for ice cream, and this shortage induces firms to raise
the price. As the figure shows, the increase in demand raises the equilibrium price from $2.00 to $2.50 and the
equilibrium quantity from 7 to 10 cones.
A Change in Market Equilibrium Due to a Shift in Supply

Suppose that during another summer, a hurricane destroys part of the sugarcane crop and drives up the
price of sugar. How does this event affect the market for ice cream? Once again, to answer this question,
we follow our three steps.

1. The change in the price of sugar, an input for making ice cream, affects the supply curve.

2. The supply curve shifts to the left because, at every price, the total amount that firms are willing and
able to sell is reduced.
3. At the old price of $2, there is now an excess demand for ice cream, and this shortage causes firms to
raise the price. As Figure 11 shows, the shift in the supply curve raises the equilibrium price from
$2.00 to $2.50 and lowers the equilibrium quantity from 7 to 4 cones.
Example: Shifts in Both Supply and Demand
• Now suppose that a heat wave and a hurricane occur during the same summer. To analyze this
combination of events, we again follow our three steps.

1. We determine that both curves must shift. The hot weather affects the demand curve
because it alters the amount of ice cream that households want to buy at any given price.
At the same time, when the hurricane drives up sugar prices, it alters the supply curve for
ice cream because it changes the amount of ice cream that firms want to sell at any
given price.

2. The demand curve shifts to the right, and the supply curve shifts to the left.
3. As Figure shows, two possible outcomes might result depending on the relative size of the demand
and supply shifts. In both cases, the equilibrium price rises. In panel (a), where demand increases
substantially while supply falls just a little, the equilibrium quantity also rises. By contrast, in panel
(b), where supply falls substantially while demand rises just a little, the equilibrium quantity falls.
Functions
 Functions
In economics a lot of use is made of functions. Demand and supply equations are two
examples of functions. Typically, functions are expressed as:
Y = f(x)
Or simplify f(x)
This means that the value of Y is dependent on the value of the terms in the bracket. In our
example above there is only one value, x, so the value of Y is dependent on the value of x. We
know from this chapter that there are several factors affecting demand and supply. The general
form of the function in such a case would look like:
Y = f(x1………..xn)
where x1 ……….xn represents a range of variables.
Given the determinants of demand and supply we could write the demand and
supply functions as:
D = f (Pn , Pn . . . Pn-1 , Y, T, P, A, E )
Where:
● Pn = Price
● Pn . . . Pn-1 = Prices of other goods (substitutes and complements)
● Y = Incomes (the level and distribution of income)
● T = Tastes and fashions
● P = The level and structure of the population
● A = Advertising
● E = Expectations of consumers
And: S = f (Pn, Pn . . . Pn-1 , H, N, F1 . . . Fm, E, Sf )

Where:
● Pn = Price
● Pn . . . Pn-1 = Profitability of other goods in production and prices of goods in joint supply
● H = Technology
● N = Natural shocks
● F1 . . . Fm = Costs of production
● E = Expectations of producers
● Sf = Social factors
• Both demand and supply functions can be represented as linear equations, and be drawn as straight line
graphs. A linear equation normally looks like:
• y = a + bx
• In this equation, y is the value plotted on the vertical axis (the dependent variable), x is the value on the
horizontal axis (the independent variable), a is a constant and b is the slope of the line (its gradient).
Remember that demand looks at the relationship between price and the quantity demanded, and supply
is the relationship between price and the quantity supplied. In both cases, the quantity demanded and
supplied are dependent on the price. So, price is the independent variable and the quantity the
dependent variable.
• Students of pure maths will notice that in economics, supply and demand graphs are the wrong way
around. Normally, the vertical Y axis represents the dependent variable and the X axis the independent
variable. In supply and demand graphs, price, the independent variable, is drawn on the Y axis and
quantity demanded and supplied, the dependent variable, on the X axis. The switch is attributed to Alfred
Marshall (1842–1924), among others, who developed supply and demand analysis in the latter part of
the 19th century. It is important, therefore, to remember which is the dependent variable and which the
independent variable as we progress through the analysis.
Applying the relationship between price and quantity demanded and supplied, we get typical
equations such as :
Qd = 2100 - 2.5P
Qs = -10 + 6P
In the case of the demand curve, the minus sign in front of the price variable tells us that there
is a negative relationship between price and quantity demanded, whereas the plus sign in front
of the price in the supply equation tells us that there is a positive relationship between price and
quantity supplied.
You may also see demand and supply equations which look like:

P = 840 - 0.4Qd
or:
P = -120 + 0.8Qs
The equation P = 840 - 0.4Qd is the inverse of the demand equation Qd = 2100 - 2.5P. We found this by
adopting the following method:
Qd = 2100 - 2.5P
Qd + 2.5P = 2100
2.5P = 2100 – Qd
2⋅ 5 P
❑
2100 − 𝑄𝑑
=
2 ⋅5 2 ⋅5
P = 840 – 0.4Qd

The important thing to remember when manipulating linear equations of this sort is that whatever you do
to one side of the equation (multiply, add, divide or subtract a number or element) you must do the same
thing to the other side.
Finding Price and Quantity

If we take the original two equations:

We can dissect them in a bit more detail in relation to the standard y = a + bx linear equation we first
introduced.
In our equations, the quantity demanded and supplied are variables in the equations. In this case, they
are dependent variables. Their value depends upon the price, the independent variable. In the case of
the demand curve, the quantity demanded will be 2100 minus 2.5 times whatever the price is. If price is
€6 then quantity demanded will be 2100 - 2.5(6) = 2085.
If price is €16 then quantity demanded will be 2100 - 2.5 (16) = 2060.

Looking at supply, if the price were €8 then the quantity supplied would be -10 + 6(8) = 38 and if price
were €16 then quantity supplied would be -10 + 6(16) = 86.
If we used the other two equations we looked at:
P = 840 - 0.4Qd
or:
P = -120 + 0.8Qs
Then we can arrive at values for P or Q assuming we have at least one of these two variables. For demand,
if P = €6 then the quantity demanded would be:
P = 840 - 0.4Qd
0.4Qd = 840 – 6

Qd = 2085

In the case of supply, if price = €8:

We know that in equilibrium, demand equals supply (D = S). To find the market equilibrium, therefore, we
set the demand and supply equations equal to each other and solve for P and Q.
Take the following demand and supply equations:

Qd = 32 - 3P
Qs = 20 + 4P

We know that in equilibrium: Qd = Qs , so, equilibrium in this market will be where:

32 - 3P = 20 + 4P

This now allows us to solve for P and so find the equilibrium price. Subtract 20 from both sides and add 3P
to both sides to get:

32 - 20 = 4P + 3P
12 = 7P

P = €1.71 (rounded to the nearest whole cent).

Qd = 32 - 3P
Qd = 32 - 3(1.71)
Qd = 32 - 5.13
Qd = 26.87
Qd = 27

Qs = 20 + 4P
Qs = 20 + 4(1.71)
Qs = 20 + 6.84
Qs = 26.84
Qs = 27
Note the figures for Qd and Qs before rounding, differ slightly because we had to round the price. Now look at
this example:
P = 3 + 0.25Qs
P = 15 - 0.75Qd
In this case the equations are defined in terms of price, but the principle of working out equilibrium is the
same as we have used above
First, set the two equations equal to each other:
3 + 0.25Qs = 15 - 0.75Qd

Then solve for Q:

0.75Qd + 0.25Qs = 15 – 3
Q = 12

Substitute Q = 12 into one of the equations to find P :

P = 3 + 0.25Qs
P = 3 + 0.25(12)
P=6
Conclusion
Thank you