Supply Demand and Equilibrium In Economics | Definition_Example_Facts

 

Supply Demand  and Equilibrium In Economics . Definition_Example_Facts

Supply and demand, along with the concept of equilibrium, form the bedrock of economic theory. They provide the framework for understanding how prices are determined in a market economy.

Supply

Supply refers to the quantity of a good or service that producers are willing to provide at various prices during a specific period. As prices increase, generally, producers are motivated to supply more of the product. This relationship between price and quantity supplied is typically upward-sloping.

Demand

Demand, on the other hand, represents the quantity of a good or service that consumers are willing to purchase at different prices during a given period. As prices decrease, consumers usually demand more of the product. This relationship between price and quantity demanded is typically downward-sloping.

Equilibrium

Equilibrium in economics occurs when the quantity of a product that consumers are willing to buy matches the quantity that producers are willing to supply at a specific price. This is where the demand and supply curves intersect. The equilibrium price is the one at which the quantity demanded equals the quantity supplied. At this point, there is neither a shortage (where demand exceeds supply) nor a surplus (where supply exceeds demand).

Formula of Supply Demand  and Equilibrium

certain equations or expressions can be utilized to describe the relationships between supply and demand.

Demand Function:

The demand function represents the relationship between the quantity demanded of a product and its determinants, such as price, income, consumer preferences, etc. It's often represented as:

Q d=f(P,Y,T,…)

Where:

Q d = Quantity demanded

P = Price of the product

Y = Income

T = Tastes and preferences

… = Other relevant factors

Supply Function:

Similarly, the supply function demonstrates the relationship between the quantity supplied of a product and its determinants, primarily the price of the product and other influencing factors:

Q s =g(P,T,…)

Where:

Q s = Quantity supplied

P = Price of the product

T = Technology

…… = Other relevant factors

Equilibrium:

Equilibrium in a market occurs where the quantity demanded equals the quantity supplied, determining the market price and quantity. The equilibrium point occurs at the intersection of the supply and demand curves:

Q d=Q s

This equilibrium condition gives the equilibrium price (P ∗ ) and equilibrium quantity (Q ∗ ).

Graphically, the supply and demand curves intersect at the equilibrium point, where the market clears, and the quantity demanded equals the quantity supplied.

Example of supply

Here's an example to illustrate the concept of supply:

Let's consider a local bakery that produces cupcakes. The bakery creates and sells cupcakes at different prices. The following table shows the bakery's supply schedule for cupcakes:

Price per Cupcake	Quantity Supplied per Day
$1	100 cupcakes
$1.50	150 cupcakes
$2	200 cupcakes
$2.50	250 cupcakes
$3	300 cupcakes

From the table:

At a price of $1 per cupcake, the bakery is willing to supply 100 cupcakes per day.

As the price increases to $1.50, the quantity supplied rises to 150 cupcakes per day.

The pattern continues, showing that as the price increases, the quantity supplied by the bakery also increases.

This example demonstrates the direct relationship between price and the quantity of cupcakes supplied. If the price of cupcakes were to decrease, the bakery might not find it as profitable to produce as many, leading to a reduction in the quantity supplied.

Various factors, such as input costs, technology, expectations, and the number of suppliers, can influence the supply of goods and services in an economy.

Example of demand

An example of demand can be illustrated by the market for smartphones:

Let's consider the demand for smartphones in a particular market:

Price of Smartphones: Suppose the price of smartphones decreases due to technological advancements or increased competition among manufacturers.

Quantity Demanded: As a result of the price decrease, consumers are more willing to buy smartphones. The quantity demanded of smartphones increases because consumers find them more affordable and valuable. For instance, if the price of smartphones decreases from $800 to $600, the quantity demanded might rise from 10,000 units to 15,000 units per month.

This inverse relationship between price and quantity demanded, assuming other factors remain constant (ceteris paribus), is depicted by the law of demand in economics. When the price of a good decreases, consumers typically buy more of that good, and when the price rises, consumers tend to buy less.

Facts of supply and demand

Here are some key facts about supply and demand: Law of Demand: This principle states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases. Conversely, as the price increases, the quantity demanded decreases. Law of Supply: According to this principle, all else being equal, as the price of a good or service increases, the quantity supplied by producers increases. As the price falls, the quantity supplied decreases. Equilibrium: In a competitive market, the point where the supply and demand curves intersect is called the equilibrium. At this point, the quantity demanded equals the quantity supplied, and the market is in balance. The price at this equilibrium is the market price. Shifts in Demand: Various factors can cause a shift in the demand curve, such as changes in consumer preferences, income levels, the prices of related goods (substitutes or complements), population changes, or expectations about the future. An increase in demand leads to a higher equilibrium price and quantity. Shifts in Supply: Changes in production costs, technology, government policies, taxes, or the number of suppliers can cause a shift in the supply curve. An increase in supply results in a lower equilibrium price and a higher quantity. Elasticity: Price elasticity of demand and supply measures the responsiveness of quantity demanded or supplied to changes in price. If demand is elastic, changes in price result in a significant change in quantity demanded. Inelastic demand means quantity changes minimally in response to price changes. Surplus and Shortage: When the price is set above the equilibrium price, it creates a surplus (excess supply), where the quantity supplied exceeds the quantity demanded. Conversely, when the price is below the equilibrium, it causes a shortage (excess demand), where the quantity demanded exceeds the quantity supplied. Market Dynamics: Markets tend to move towards equilibrium. If there's a surplus, prices usually fall to increase quantity demanded and decrease quantity supplied. In the case of a shortage, prices typically rise to decrease quantity demanded and increase quantity supplied, ultimately reaching equilibrium.

Frequently Asked Questions :

What is the law of demand? The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded for it increases, and vice versa.

What factors can cause a shift in the demand curve? Several factors can shift the demand curve, including changes in consumer income, preferences, the prices of related goods (substitutes or complements), population demographics, and consumer expectations.

What is the law of supply? The law of supply suggests that, all else being equal, as the price of a good or service increases, the quantity supplied for it also increases, and vice versa.

What factors can cause a shift in the supply curve? Factors that can shift the supply curve include changes in production costs (e.g., labor, raw materials, technology), taxes or subsidies, changes in the number of suppliers, and expectations about future prices.

What is equilibrium in economics? Equilibrium is the point where the quantity demanded by consumers matches the quantity supplied by producers, resulting in a market-clearing price where there's no pressure for change.

How is equilibrium price determined? The equilibrium price is determined at the intersection of the supply and demand curves. It's the price at which the quantity demanded equals the quantity supplied.

What happens if there is a shortage in the market? A shortage occurs when the quantity demanded exceeds the quantity supplied at the current price. In response, prices tend to rise as suppliers seek to balance the market.

What happens if there is a surplus in the market? A surplus happens when the quantity supplied exceeds the quantity demanded at the prevailing price. In such cases, prices typically decrease as suppliers try to sell excess goods.

Can the equilibrium price and quantity change? Yes, the equilibrium price and quantity can change due to shifts in either the supply or demand curves. For instance, changes in consumer preferences or advancements in technology can alter both.

Why is understanding supply, demand, and equilibrium important? Understanding these concepts is crucial as they form the basis of how prices are determined in a market economy. It helps businesses make production decisions, aids policymakers in understanding market dynamics, and enables consumers to make informed choices based on changing market conditions.