DEMAND AND
SUPPLY - Part 2
Dr. Rama Pal
Department of Economics, IITB
Email: ramapal@iitb.ac.in
SUPPLY
2
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
equal, the quantity supplied of a good rises
when the price of the good rises.
Dr. Rama Pal, Dept of Econ EC 101 3
THE SUPPLY SCHEDULE FOR
ICE-CREAM CONE
● The supply schedule for a commodity shows the
relationship between its market price and the
amount of that commodity that producers are
willing to produce and sell, other things held
constant
Price Quantity
Supplied
5 18
4 16
3 12
2 7
1 0
Dr. Rama Pal, Dept of Econ EC 101 4
THE SUPPLY CURVE
Price
SS
Quantity
Dr. Rama Pal, Dept of Econ EC 101 5
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. (Graph)
Dr. Rama Pal, Dept of Econ EC 101 6
WHAT ARE ‘OTHER THINGS’?
● Technology
● Input prices
● Expectations
● Government policy
● Number of sellers
Dr. Rama Pal, Dept of Econ EC 101 7
SHIFTS IN THE SUPPLY CURVE
●Change in Supply
○ A shift in the supply curve, either to the left
or right.
○ Caused by a change in a determinant other
than price.
Dr. Rama Pal, Dept of Econ EC 101 8
SHIFTS IN SUPPLY
● When changes in factors other than a good’s own
price affect the quantity supplied, we call these
changes shifts in supply.
Price SS
SS2
1
Quantit
y
Dr. Rama Pal, Dept of Econ EC 101 9
MARKET EQUILIBRIUM
10
SUPPLY AND DEMAND
TOGETHER
●Equilibrium refers to a situation in
which the price has reached the level
where quantity supplied equals
quantity demanded.
Dr. Rama Pal, Dept of Econ EC 101 11
SUPPLY AND DEMAND
TOGETHER
● 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.
Dr. Rama Pal, Dept of Econ EC 101 12
EQUILIBRIUM OF SUPPLY AND
DEMAND
● A market equilibrium comes at the price at
which quantity demanded equals quantity
supplied.
Price
SS
P*
D
D
Quantity
Q*
Dr. Rama Pal, Dept of Econ EC 101 13
EQUILIBRIUM
● Surplus
○ When price > equilibrium price, then
quantity supplied > quantity demanded.
■ There is excess supply or a surplus.
■ Suppliers will lower the price to increase sales,
thereby moving toward equilibrium.
Dr. Rama Pal, Dept of Econ EC 101 14
EQUILIBRIUM
● Shortage
○ When price < equilibrium price, then quantity
demanded > the quantity supplied.
■ There is excess demand or a shortage.
■ Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
Dr. Rama Pal, Dept of Econ EC 101 15
EQUILIBRIUM
●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.
Dr. Rama Pal, Dept of Econ EC 101 16
ANALYSING CHANGES IN EQUILIBRIUM
17
INCREASE IN DEMAND
● Shift in DD outwards
Price
SS
E2
P**
E1
P*
DD
DD
2
Quantity
Q* Q** Q1
Dr. Rama Pal, Dept of Econ EC 101 18
INCREASE IN SUPPLY
● Shift in SS outwards
Price
SS1
SS2
E1
P*
P** E2 D
D
Quantity
Q* Q** Q1
Dr. Rama Pal, Dept of Econ EC 101 19
