Market Equilibrium

Demand and its Determinants:

A General Definition:
Demand is the quantity of a good or
resource that buyers (or demanders) are
willing and able to buy under a given set of
conditions over a given period of time.
Will to Purchase
Power to Purchase
Conditions: Only changing in price and there is
no changing (remaining same) in consumer’s
income, taste, prices of related goods,
expected prices, number of buyers, etc.
 Definition of Demand

When buyer agree to purchase a

specific quantity of good, in a
specific time period, in specific
price its call demand
 Law of Demand

The inverse relationship between the price and

the quantity demanded of a good or service
during some period of time.

The quantity demanded rises as price falls,

Quantity demanded falls as prices rise, it’s
called law of demand, other things constant
(such as income or the prices of competitive
products).
 Assumptions:
Assumption of law of demand
• Only change of required goods price
• there is no change in:
1. consumer Income
2. Consumer Test
3. Price of substitute goods
 Now we used table and graph for further
explanation of law of demand
Quantity Price of Fig: Quantity of Demand
of Good 25
Demand
20

30 20 15

Price
10
40 15
5
50 10
0
10 20 30 40
60 5 Qd
 Detail of figure:
• In this figure OX excise shows quantity of demand and
OY excise shows the price of good
• Shows the negative relationship between price and
quantity demand for a good or service
• Derived from a demand schedule showing the quantity
deman various prices.
25
Fig: Quantity of Demand
20
15
Price

10
5
0
10 20 30 40
Qd
Define supply and law of supply
Supply means when a producer is will to
sale a specific quantity of product, in
specific price and in specific time period

The various amounts of a product that

producers are willing and able to supply
at various prices during some specific
period
 Supply and Stock
• Supply refers to that quantity of the commodity
which is actually brought into the market fore sale
at a given price per unit of time. While Stock is
meant the total quantity of a commodity this exists
in a market and can be offered for sale at a short
notice.
• Difference: Stock is the total quantity of goods
available for sale with a seller at a particular point
in time. Supply refers to the quantity of goods that
a seller is able and willing to offer for sale at a
particular price during a certain period of
time. Stock is the outcome of production.
 Law of Supply

• The positive relationship between the price and the

quantity supply of a good or service during some
period of time
• The increased price causes increased quantity
supplied, Decreased price causes decreased
quantity supplied it called law of supply, other
things constant (such as method of production
and technology of production, price of raw
material and price of factor of product etc.).
 Assumptions of supply

• Only change of required goods price and

• there is no change in:
1. Numbers of suppliers
2. Method of production
3. Technology of production
4. Raw material (which required product)
5. In government rule
 Now further explain about law of supply
with the help of table and figure

Quantity Price of Quantity of Supply

of supply Good 25

20

15
30 20
Prce

10

40 15 5

50 10 0
10 20 30 40
Qs
60 5
 Detail of figure:
• In this figure OX excise shows quantity of
supply and OY excise shows the price of good
• Shows the positive relationship between price
and quantity supply for a good or service
• Derived from a supply schedule showing the
quantity supply various prices.
 Define market equilibrium
• Market means
A market is any institutional structure, or
mechanism, that brings together buyers and sellers
of particular goods and services. They determine
the price and quantity of a good or service
transacted
An actual or nominal place where forces of
demand and supply operate, and where buyers
and sellers interact (directly or through
intermediaries) to trade goods, services, or
contracts or instruments, for money or barter.
 Market Equilibrium
• Market equilibrium occurred, when the
buying decisions of households and the
selling decisions of producers are equated.
Determines the equilibrium price and
equilibrium quantity bought and sold in the
market.
• Market / economic equilibrium is a state
where economic forces such as supply and
demand are balanced on same price
• This is where the quantity demanded
and quantity supplied are equal on
same price.
• Market equilibrium is find, where the
quantity demanded and quantity
supplied become equal on same price.
• The corresponding price is the
equilibrium price or market-clearing
price, the quantity is the equilibrium
quantity.
 Further detail
• The quantity demanded rises as price falls,
Quantity demanded falls as prices rise, other
then increased price causes increased
quantity supplied, Decreased price causes
decreased quantity supplied.
• With an upward-sloping supply curve and a
downward-sloping demand curve, there
is only a single price at which the two curves
intersect. This means there is only one price at
which equilibrium is achieved.
 Now further explain about Equilibrium of
Market with the help of table and figure
Price Quantity of Quantity of
supply demand
Fig: Equalibrium of Market
60
50 D S 10 100 500

40 20 200 400
E
Price

30
30 300 300
20
S D
10 40 400 200

0
100 200 300 400 500 50 500 100
Qd & Qs
 Detail of figure:
1. In this figure OX excise shows quantity of supply &demand and
OY excise shows the price of good
2. SS curve shows the positive relationship between price and
quantity supply for a good. SS curve goes to upward from left to
right. Derived from a supply schedule showing the quantity
supply at various prices.
3. DD curve shows the inverse relationship between price and
quantity demanded for a goods. DD curve goes fall from left to
right. Derived from a demand schedule showing the quantity
demanded at various prices.
4. The equilibrium point is E (Equilibrium point) where the
quantity of demand and quantity of supply become equal on
same price so the equilibrium price is 40 and equilibrium
Changing with demand and supply curve

1. Upward and downward demand in different

price level on a demand curve

• Changing with demand and supply

curve
• Changing in demand and supply with
one price
 Elasticity of demand and Supply
• There are 5 types of elasticity of demand:
• Perfectly Elastic Demand (EP = ∞) ...
• Perfectly Inelastic Demand (EP = 0) ...
• Relatively Elastic Demand (EP> 1) ...
• Relatively Inelastic Demand (Ep< 1 ) ...
• Unitary Elastic Demand ( Ep = 1)
 QD p
4 8
3 10
=1 P =2

PED

PED=0.5%
ED=1
ED>1
ED<1
Q4: Define Market Equilibrium with the help of
equation of demand and supply
• Equilibrium is achieved at the price at which
quantities demanded and supplied are equal.
We can represent a market in equilibrium in a
graph by showing the combined price and
quantity at which the supply and demand
curves intersect.
 Market Equilibrium
The Demand equation and Supply equation are given, then we can
also determine the market price and quantity. • For e.g.
1. Qd = 40 – 4P
2. Qs = 10 + 2P
What is the equilibrium P and Q?
At equilibrium QD = QS,
QD = QS
40 – 4P = 10 + 2P
40 – 10 = 2P + 4P
30 = 6P
P = 30/6
P= 5
So equilibrium Price = Rs.5
 equilibrium Q,
To get equilibrium Q, Similarly, if we take the S
substitute P = 5 in D, we equation,
get, Qs = 10 + 2P
1. Qd = 40 – 4P • Qs = 10 + 2 ( 5)
2. Qs = 10 + 2P • Qs = 10+10
Qd = 40 – 4P • Qs = 20 Q
• QD = 40 – 4P • D = S, at P = Rs.5.
• 40 – 4 ( 5) • This is the Market
• 40 – 20 = clearing Price or
Equilibrium Price.
• Qd=20 Q
 How to create an equation
• Formula of creation of equation

• (Q-Q1)=(P-P1)

P 100 p1 200 p2
Q 20 Q1 10 Q2