Equilibrium Price

Equilibrium Price 

Equilibrium Price refers to the the market price at which the supply of an item equals thedemand of it. equilibrium is an important concept in economics. Equilibrium price is also referred as the equilibrium output.
Market equilibrium. 
Market equilibrium occurs where the amount consumers wish to purchase at a particular price is the same as the amount producers are willing to offer for sale at that price. It is the point at which there is no incentive for producers or consumers to change their behaviour.
Equilibrium price and output are found at the point of intersection of demand and the supply curve. 

Equilibrium Point is the Point where Quantity Demanded = Quantity supplied.
( Both quantity Demanded and quantity supplied are displayed on x-axis.)

Here, P₁ is the equilibrium price. At P1,
Quantity demanded = Quantity supplied.
Q _D+S is the equilibrium level of quantity demanded and supplied

Example to Find out equilibrium Price

Given Demand and Supply functions are

Qd = 3P + 2 (1)
Qs = 10 - P (2)

In equilibrium, Qs = Qd.

And so, we can equate (1) and (2)

Qd = Qs
or 3P + 2 = 10 - P
or 3p + p = 10 - 2
or 4p =8 or p = 2

So, for the given equations, Equilibrium Price = 2

And to calculate the quantity Demanded, we will put the value of p in equation (1)
Qd = 3P + 2
= 3(2) + 2 = 8

And Qs = 8

And the equilibrium level of output is Qd = Qs = 8

Change in supply and Increase/decrease in quantity supplied

Movement and Shift in the Supply Curve 

Other things being equal, Supply of a commodity has a positive relationship with the price of the commodity

(Change)Movement in supply – movement in supply can be demonstrated as the change in quantity supplies as a result of change in price. Movement is along the same supply curve.

(Increase/ Decrease)Shift in supply - changes in other relevant factors other than price cause a shift in supply, that is, a shift of the supply curve to the left or right. Such a shift results in a change in quantity supplied for a given price level. If the change causes an increase in the quantity supplied at each price, the supply curve would shift to the right and if the change causes an decrease in the quantity supplied at each price, the supply curve would shift to the left.

 

Here. 

• S = initial supply curve
• D = initial demand curve
• S1 = new supply curve
• This new supply curve shows increase in supply at the same price.
• It means factors other than price are responsible for an increase in supply.
• Earlier at P1, Q D+S was supplied and now, due to change in factors, Qs1 is supplied.

Change in Demand and Increase/Decrease in quantity demanded

Movement and Shift in the Demand Curve

Other things being equal, Demand of a commodity has a negative relationship with the price of the commodity

(Change)Movement in Demand – Movement in demand can be demonstrated as the change in quantity demandedas a result of change in price. Movement is along the same demand curve. When price increases, demand decreases

( Increase/ Decrease)Shift in Demand - changes in other relevant factors other than price cause a shift in demand, that is, a shift of the demand curve to the left or right. Such a shift results in a change in quantity supplied for a given price level. Shift of the demand is called increase or decrease in demand. If the change causes an increase in the quantity demanded at the same price, the demand curve would shift to the right and if the change causes an decrease in the quantity demanded at the same price, the supply curve would shift to the left.

In the above curve, 

• D = initial demand curve
• S = initial supply curve
• D1 = new demand curve
• This new demand curve shows increase in demand at the same price.
• It means factors other than price are responsible for an increase in demand.
• Earlier at P1, Q D+S was demanded and now, due to change in factors, QD1 is demanded.

Law of Supply

The law of supply states that the higher the price, the larger the quantity supplied, all other things constant. The law of supply is demonstrated by the upward slope of the supply curve.

the supply curve often is approximated as a straight line to simplify analysis. A straight-line supply function would have the following structure:

Quantity = a + (b) Price

Quantity Supplied is a function of price.

where a and b are constant for each supply curve.

A change in price results in a change in quantity supplied and represents movement along the supply curve.

Law of supply can be understood with the following schedule and Curve.

According to law of Supply , " Quantity supplied increases with the increase in price".

Supply

Now that we know about demand its time we discuss about Supply .

Supply of a commodity can be defined as the amount of goods that producers are willing to supply / sell at a given price.

Supply and Price Price usually is a major determinant in the quantity supplied. In virtually all cases supply increases as price increases and vice versa.

This is because producers want to make profit. - If the good is sold at a high price they want more quantities of it to be sold and they will make
more profit.
- and if it is sold at a lower price they will either make very less profit or a loss.

Supply Schedule 

Supply curve shows the relationship between supply and price.

supply curve displays the quantity supplied on the x-axis as the independent variable and price on the y-axis as the dependent variable.

Law of Demand

Law of demand states that all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa. 

Here all other factors mean all the factors affecting demand. 

Law of demand explains the negative relationship and negative slope of demand curve

The demand curve slopes downwards due to the following reasons

(1) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. Thus, the quantity demanded of the commodity, whose price has fallen, rises.

(2) Income effect: With the fall in the price of a commodity, the consumer can buy more quantity of the commodity with his given income because as a result of a fall in the price of the commodity, consumer’s real income increases and so, the demand for the commodity. 

(3) Number of consumers: When price of a commodity is high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it. So, the total demand increases. 

(4) future expectations - When a consumer expects the prices of commodities to rise in near future, he starts making more demand and vice versa. E.g. when we expect that the prices of gas cylinder is going to rise after few days, we start making more demand at low prices. 

(5)Several uses of the commodity- When the price of a commodity falls, people start demanding more to put it into different uses Eg. Milk. When the price of milk falls, we start demanding more of it so as to make butter, sweets and curd etc. 

Exceptions to the law of Demand 

• Inferior goods - Demand decreases with fall in price. Eg. - Dalda ghee
• Articles of snob appeal - Demand increases with increase in prices. Eg. - Precious paintings and Jewellery
• Emergencies- peaople demand more even at high prices in case of emergency.
• Quality-price relationship - Quality concious people dont buy more at less prices.
• Conspicuous necessities - Price demand relationship is not followed in case of necessities. Demand doesnot decreases with rise in prices for necessities.
• Ignorance - Sometimes an unaware consumer thinks that if he will pay more, he will get better.
• Change in fashion, habits, attitudes - If a product goes out of fashion or people start disliking it. Its demand doesnt increase even with a fall in price.

Market Demand

Supply curve shows the relationship between supply and price.

supply curve displays the quantity supplied on the x-axis as the independent variable and price on the y-axis as the dependent variable.

1. Supply curve shows the relationship between supply and price.

2. Supply curve displays the quantity supplied on the x-axis as the independent 

variable and price on the y-axis as the dependent variable.