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Equilibrium - CMA

Change in Equilibrium Price due to Shift in Supply

Studying the change in market equilibrium can become complex if one is not well aware of the economic fundamentals. Therefore, it is crucial to understand the economic concept of supply and demand. Let us learn this in detail. 

Introducing Supply and Supply Curve

Supply refers to the total quantity of goods that the seller is willing to sell (offer for sale) at:

  • a given price
  • a particular time
  • a given market, when other things remaining constant.

Moreover, the supply curve is a graphical representation of the supply schedule (which is also known as the supply function). It is a locus of points which shows the number of goods supplied at various prices. As per the Law of Supply, the demand curve slopes upwards.

change in market equilibrium

A Supply Function is a mathematical representation of the supplies of a number of goods and various factors determining the supply.

Qd = f(Px, Y, COP, C, T, Inp……..)

Some of the determining factors of supply are as follows:

  • Px = Price of the product
  • Y = Income of the consumer
  • COP = Cost of Production
  • C = Competition / number of sellers
  • T = Tax
  • Inp = Inputs of production

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What is Market Equilibrium?

A market equilibrium refers to the price-quantity pair where the quantity demanded is equal to the quantity supplied. The market equilibrium representation is possible when the market supply and the market demand intersect, keeping all other things constant.

change in market equilibrium

Impact of Changes in Market Equilibrium

Further, we can explain the impact of changes in supply on price and output of commodity while the demand for the commodity remaining the same.

Also, beginning with the examining of increase in supply. Suppose in a year there is good Monsoon in India yielding a lot of excesses and a surplus crop of wheat.

Furthermore, this will directly increase the supply of wheat in the Indian market causing a shift in its supply curve to the right.

Moreover, the impact of an increase in the supply of wheat on the equilibrium price and the equilibrium quantity is in a graphical form (in figure 24.4) below.

However, originally, the demand curve (DD) and supply curve (SS) intersect at E. This determines that the equilibrium price is equal to OP and the equilibrium quantity is equal to OQ.

change in market equilibrium

 

   change in market equilibrium

Further, due to good monsoon resulting in a bumper crop of wheat the supply curve of wheat shifts to the right from SS to the new position S1S1. The new supply curve (S1S1) intersects the given demand curve DD at point E1, which determines the new lower equilibrium price OP1 and larger quantity OQ1.

Thus, the increase in supply leads to the fall in price and consequent increase in equilibrium quantity.

However, drastic improvements in technology, fair reduction in the prices of factors of pro­duction of a commodity or minimal lowering of excise duty on a commodity also lead to the increase in the supply of the commodity.

For example, the recent year improvements in technology in the manufac­ture of personal computers have served to increase the supply of personal computers causing their supply curve to shift to the right. This has resulted in lowering the prices of personal computers.

To know more about the supply, tap here.

 Question on Change in Market Equilibrium

Q. Which point marks the point of demand and supply equilibrium?

Answer: The point on the graph where the demand curve and the supply curve meet is known as the point of equilibrium.

Q. What happens to the price and the quantity when the supply increases?

Answer: The price of the product decreases and the quantity supplied increases.

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