INTERACTION OF

SUPPLY AND DEMAND

Price Adjustments and Market Equilibrium

When there is a mismatch between the quantity

buyers choose to purchase and the quantity sellers
choose to sell, a market shortage or surplus will result.

Competition will lead to price adjustments that will

correct the discrepancy between the quantity buyers
choose to purchase and the quantity sellers choose to
sell.

By putting the demand and supply curves together,

we should be able to see how markets coordinate the
independent decisions of consumers and producers
through a rise or fall in the price.
Market Equilibrium
A situation in which two sides of the market
balance each other.
It happens when the price balances the
amount that consumers plan to buy and the
amount that producers plan to sell.

Qs = Qd
Price Qd Qs
20 70 65
30 65 60
40 60 55
50 50 50
60 45 40
70 40 35
 Price Demand
Supply
(₱ per unit) 100

80
Price- ₱ 50
60 Qd= 50,000
Qs= 50,000
50

Equilibrium 40
price
20 Equilibrium
quantity

0
20 40 50 60 80 100 120
Quantity
(thousand of units per week)
Market Shortage
Excess demand

A situation in which the quantity

demanded is greater than the quantity
supplied.

Graphically, it occurs at any price below

the intersection of the demand and
supply curves.
 Market Shortage
Price
(₱ per unit) 100
Price- ₱ 40
80 Qd= 60,000
Qs= 40,000
60

50 Below the Equilibrium

Price
Equilibrium 40
price
20
Shortage
0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
Market Surplus
Excess supply

A situation in which the quantity

supplied is greater than the quantity
demanded.

Graphically, it occurs at any price

above the intersection of the demand
and supply curves.
 Market Surplus
Price
(₱ per unit) 100
Price- ₱ 60
Surplus
80 Qd= 40,000
Qs= 60,000
60

50
Above the Equilibrium
40 Price
Equilibrium
price
20

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
 The Effects of Changes in
Demand and Supply

The equilibrium price and the equilibrium quantity

will remain the same until changes in demand and
supply move the price and quantity toward a new
equilibrium
 Change in Demand but No Change in Supply
a) An increase in demand from D1 to D2 raises the
equilibrium price from ₱50 to ₱60 and the equilibrium
quantity from 50,000 to 60,000.

60

50

40 D2
Price
(₱ per unit) D
20

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
 Change in Demand but No Change in Supply
b) The decrease in demand from D1 to D3 lowers the
equilibrium price from ₱50 to ₱40 and the equilibrium quantity
from 50,000 to 40,000.

60

50

40
Price
(₱ per unit) D1
20 D3

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
 Change in Supply but No Change in Demand
a) An increase in supply from S1 to S2 lowers the equilibrium
price from ₱ 50 to ₱ 40 and raises the equilibrium quantity
from 50,000 to 60,000.

S1

S2
60

50

40
Price
(₱ per unit) D
20

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
 Change in Supply but No Change in Demand
b) The decrease in supply from S1 to Se raises the
equilibrium price from ₱ 50 to ₱ 60 and lowers the equilibrium
quantity from 50,000 to 40,000.
S3 S1

60

50

40
Price D
(₱ per unit)

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
 Increase in Both Demand and Supply
Combines the effects of an increase in demand and an increase
in supply.
or =
Qs Qd Eq
S1

S2
60

50

40
Price
(₱ per unit) D
20

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
 Change in Supply but No Change in Demand
b) The decrease in supply from S1 to Se raises the
equilibrium price from ₱ 50 to ₱ 60 and lowers the equilibrium
quantity from 50,000 to 40,000.
S3 S1

60

50

40
Price D
(₱ per unit)

0
20 40 50 60 80 100 120
Quantity demanded
(thousand of units per week)
Price Qd1 Qd2 Qd3

30 40 60 50
40 35 55 45
50 30 50 40
60 25 45 35
70 20 40 30
Price Qs1 Qs2 Qs3

30 30 40 20
40 35 45 25
50 40 50 30
60 45 55 35
70 50 60 40
Price Quantity Demanded Quantity Supplied
(thousands of kilos) (thousands of kilos)

30 500 100
40 400 200
50 300 300
60 200 400
70 100 500