Supply, Supply Curve, and Change in Market Equilibrium:
Market equilibrium study is a harder challenge, and it gets tougher when an individual has no idea about several fundamentals of the economic concepts. Thus, it is necessary to have an understanding of all the concepts involved, especially the ones that are more important, like supply and demand.
Starting with the concepts, what do you understand by the supply and supply curve?
Supply is the total quality of all the goods that the seller willingly sells or offers at a sale at:
A given amount
A said time
A decided market, when the other things are constant.
Furthermore, a supply curve is a graphical representation that is useful to explain the supply schedules (also called supply function) effectively. It acts as the logistic planning of the points showing the amount of well supplied at different prices. According to the Law of Supply, the slope of the demand curve is upwards moving.
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Furthermore, let us move on to a supply function (supply schedule). A supply schedule (function) is the mathematical representation of the supplies of the total number of goods and different factors that help in determining the supply.
Qd = f(Px, Y, COP, C, T, Inp, …)
The major determining factors in a supply function are as follows:
Px – The cost of the product
Y – The consumer’s income
COP – Cost of production
C – Number of sellers OR total competition
T – Tax
Inp – Production’s input
Market Equilibrium:
Moving ahead, let us discuss the definition of the market equilibrium.
The market equilibrium is the pair of price and quantity in which the demanded quantity equals the supplied quantity. The representation of Market equilibrium is possible when the market demand and market supply intersects, keeping the other factors constant.
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Changes in Market Equilibrium and its Impacts –
Further, we will start with the discussion on changes in market equilibrium, changes in market price, changes in equilibrium price, and other defining factors. Also, we can explain the changes’ impacts on supplies, prices, and commodity output when the commodity demand stays constant.
Starting with the examination of the increase in supplies, consider that last year India experienced a good monsoon season, thus yielding higher excess and surplus in the number of wheat crops. This would have directly raised the wheat supply across the Indian market, causing a right shift to the supply curve.
Additionally, the increase in wheat supplies has an impact on the equilibrium quantity, and the equilibrium price is mentioned in the below graphical representation.
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Generally, the demand curve (DD) and the supply curve (SS) intersects at point E. This is the factor that determines that OP is the equilibrium price’s measurement, and OQ is the measurement of equilibrium quantity.
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Furthermore, due to the better monsoon season, there must have been a result of bumper wheat crops, thus the supply curve of wheat shifts towards the right from the line SS to the new one, i.e., S1S1. Now, S1S1 (the latest supply curve) intersects DD (the given demand curve) at point E1, determining OP1, the new lower equilibrium price, and OQ1, the larger quantity.
Thus, the increasing supply resulted in the falling price and increase the quantity of equilibrium.
But, rapid enhancements in the technologies, reduced prices for the factors of commodity production or lowered excise duty on any commodity results in the increased commodity supplies.
For example, given, the recent improvements in technology for personal computers’ manufactures served for increasing the personal computers’ supplies. This resulted in the shift in the supply curve towards the right side. Thus, it also resulted in the lowered-down prices of personal computers.
FAQs on Price Equilibrium Changes Due to Supply Shifts
1. What happens to the equilibrium price and quantity when the supply of a commodity changes, assuming demand stays constant?
When the supply of a commodity changes while demand remains the same, both the equilibrium price and equilibrium quantity are affected.
- An increase in supply causes the equilibrium price to fall and the equilibrium quantity to rise.
- A decrease in supply causes the equilibrium price to rise and the equilibrium quantity to fall.
2. What is the effect of an increase in supply on the equilibrium price and quantity?
An increase in supply leads to a rightward shift in the supply curve. At the original equilibrium price, this creates a situation of excess supply (or surplus), where sellers are willing to sell more than buyers are willing to purchase. To sell the extra stock, producers lower their prices. This price reduction continues until a new, lower equilibrium price is reached, where the quantity demanded equals the new, higher quantity supplied. Therefore, an increase in supply results in a lower equilibrium price and a higher equilibrium quantity.
3. How does a decrease in supply impact the market equilibrium?
A decrease in supply leads to a leftward shift in the supply curve. At the original price, this creates a situation of excess demand (or shortage), as consumers want to buy more than what is available. This shortage puts upward pressure on the price, as consumers may be willing to pay more to acquire the limited goods. The price rises until it reaches a new, higher equilibrium level where the quantity demanded equals the new, lower quantity supplied. Thus, a decrease in supply results in a higher equilibrium price and a lower equilibrium quantity.
4. Can you provide a real-world example of a supply shift affecting equilibrium price?
A classic example is the market for agricultural products. If a country experiences an exceptionally good monsoon season, the harvest of crops like wheat or rice increases significantly. This increase in supply shifts the supply curve to the right. As a result, there is a surplus of these crops in the market, leading to a fall in their equilibrium price. Conversely, a drought would decrease the supply, shifting the curve to the left and causing food prices to rise.
5. Why does the equilibrium price fall when supply increases?
The equilibrium price falls when supply increases due to the market mechanism that resolves a surplus. When the supply curve shifts to the right, at the initial price, the quantity supplied exceeds the quantity demanded. Producers are left with unsold inventory. To clear this stock and attract buyers, they are forced to lower the price. This downward price adjustment signals to consumers that the good is more affordable, increasing the quantity they are willing to buy. The price continues to drop until it finds a new balance where the quantity demanded matches the new, larger quantity supplied.
6. What is the difference between a 'change in supply' and a 'change in quantity supplied'?
This is a crucial distinction in economics.
- A 'change in supply' refers to a shift of the entire supply curve, either to the right (increase) or left (decrease). It is caused by factors other than the commodity's own price, such as changes in technology, input prices, or government taxes. A change in supply leads to a new market equilibrium price and quantity.
- A 'change in quantity supplied' refers to a movement along a given supply curve. It is caused only by a change in the commodity's own price. It does not create a new equilibrium but is rather the market's response to a price change as it moves toward equilibrium.
7. What happens to the equilibrium price if supply decreases while demand simultaneously increases?
When supply decreases and demand increases at the same time, the impact on the equilibrium price is definite, but the impact on the equilibrium quantity is ambiguous.
- Effect on Price: A decrease in supply puts upward pressure on the price. An increase in demand also puts upward pressure on the price. Since both forces push the price in the same direction, the equilibrium price will definitively increase.
- Effect on Quantity: The effect on the equilibrium quantity is indeterminate without knowing the magnitude of the shifts. The decrease in supply tends to lower the quantity, while the increase in demand tends to raise it. The final outcome depends on which effect is stronger.
