Supply Analysis and Determination of Market Equilibrium

Supply means the amount or quantity of a goods or services that a seller

is ready to sell at a particular price at a given time. If a seller X wants to
sell 40kg of commodity Y at taka 10 per unit at Friday morning on
16.5.2010. Then the supply of Y is 40kg.
Supply and Stock are not same. Supply is a part of stock. Stock means
the total amount of goods or services that the seller can sell. Say Mr. X
has 200 Kg of commodity Y for sale. So this his stock of Y. But he wants
to sell only 40kg of Y at price 10 per unit, then the stock is 200kg but the
supply is only 40kg.
Supply depends on a number of factors. These are the determinants of
supply. Normally supply mostly depends on price of the commodity.
Determinants of Supply:
1.Price of Goods
2.Production Cost
3.Availability of Substitutes
4.Profit
5.Number of Consumers
6.Demand for complementary goods
7.Production of joint products
8.Availability of raw materials
9.Weather and Climate
10.Technological Change
11.Tax and Subsidy
12.Political Stability and Social Security
Supply Function
S = f (P, Py, Cp, R, W, T, PS, Ds, Pr, ……)
S= Supply, P= Price of Goods , Py = Price of related goods, Cp = Cost of
Production, R = Raw materials availability, W = weather, T= Technological
Change, PS= production of substitutes, Ds= Demand for substitutes, Pr =
Profits
If other factors remain constant then the quantity supplied of a commodity
depends on its own price. So in short the supply function is Sx = f(Px)

Supply Law: Remaining other factors constant, if price of a commodity

increases the quantity supplied of that commodity at a given period of time
increases and vice versa. This direct or positive relationship between price
and quantity supplied is referred as Law of Supply.
Supply Schedule and Supply Curve
Supply Schedule is the tabular or arithmetic representation of Supply Law.
Supply Curve is graphical representation of Supply schedule or supply
law.

Supply Schedule:
Price(Taka per unit) Quantity Supplied(kg)
10 100
7 70
5 50
3 30
P S
Supply Curve:
P3

P2
P1

S
Qs
0 Q1 Q2 Q3
Supply Equation:
Qs = f(P) = a + bP Liner Supply Curve, ∆Qs /∆P = b > 0
Qs = f(P) = a + bP2 Non-Liner Supply Curve, ∆Qs /∆P = 2bP > 0

Change in Quantity Supplied and Change in Supply

Change in Quantity Supplied means the movement along the same
supply curve following the law of supply. Change in Supply means the
change of other factors remaining price constant which shifts the
original supply curve either upward or inward. S1

S S
z
z1 S2
Supply Elasticity

Elasticity of Supply refers to the degree of responsiveness of Quantity

Supplied of a commodity due to the changes of its Price or other
determinants of Supply.

Elasticity of supply is a measure of the change to which the quantity

supplied responds to its price changes.

Formula:
Price Elasticity of Supply , Sp = ∆Qs / ∆P X P/Qs

Or Sp = % Change in Quantity Supplied / % Change in Price

Elastic Supply and Inelastic Supply.

Elastic Supply means higher degree of responsiveness. Inelastic

Supply means less degree of responsiveness.
Different measures of elasticity of supply

1.Es = 1, change of Qs is equal to the change in Price

2.Es > 1, change of Qs is greater than to the change in Price
3.Es < 1, change of Qs is less than to the change in Price
4.Es = 0, No change in Qs to the change in Price
5.Es = ∞, change of Qs when no change in Price

If P = 10 and Qs = 40kg and P = 5 and Qs = 30kg then Es = 0.5

If Qs = -4 + 2P , Find the Es when P =4

Es = ∆Qs / ∆P X P/Qs = 2 x P/ (-4 + 2P) = 2x 4/(4) = 2
Market Equilibrium by Demand and Supply

We know there are two forces active in market one id demand and the other is
supply. Consumers wants to buy at less prices and Sellers want to sell at higher
prices. But the price is fixed by the agreed price through the interaction between
buyers and sellers.
Equilibrium means a situation where the related forces have no tendency to
move or change. So market equilibrium means such a situation where the
determining forces or factors have no tendency to move. Market equilibrium is
determined by the interaction between demand and supply. The equilibrium price
and quantity tells us that at a agreed price how much quantity is demanded by
the consumer is exactly same the quantity supplied by the sellers. Qd = Qs
P Qd Qs
10 20 10 Qd > Qs, P goes up
15 15 15 Qd = Qs, Equilibrium Position, Steady State
20 10 20 Qd < Qs, P decreases
Market Equilibrium by Demand Curve and Supply Curve

We can show the market equilibrium by the demand curve and supply curve.
Demand curve is downward sloping and supply curve is upward sloping. Market
equilibrium is determined at the intersection point of demand cure and supply
curve because at that point Qd=Qs. In figure:

S
Qd <Qs
P2
P Qd=Qs
P1 Qd >Qs
D

Q
Shifts of Market Equilibrium
Market equilibrium can changed or shifted and new equilibrium is establishment.
There are many factors which cause the initial equilibrium to shift or change.
A. Change in Demand Factors such as income change, population increase etc.
When income increases the demand curve shifts upward, when income
decreases demand curve shifts inward. Such as the case for population increase
or decrease. When income tax is imposed or increase the demand curve shifts
inward.

S
E1
E
P
E2
D1
D2 D
Q
B. Change in Supply: When supply factors such as tax, rainfall, shortage of raw
materials, increase input cost etc changes the supply curve shifts causing the
equilibrium to change. When tax is increased then the cost of production
increases and the supply curve shifts inward. When good or enough rainfall
occurs ten production increases and this shifts supply curve outward.
S1

S
E1
S2
E
P
E2

Q
Let Qd= 20-2P and Qs = 4+2P
The Equilibrium is , Qd = Qs , 20-2P = 4+2P or 16 = 4P, P = 4, Q = 12
Now if Government imposes sales tax, taka 3 per unit. What will be the
equilibrium?
The supply function after tax is Q1s = 4 + 2(P-3) = 4 + 2P -6 = -2 + 2P
New equilibrium, 20 -2P = -2 + 2P or, 22 = 4P or, P = 5.5, Q = 9.
The implication of tax is that P goes up to 5.5 from 4 and equilibrium quantity
decreases to 9 from 12. So the new equilibrium is attained at higher price and
lower quantity. In figure new equilibrium is attained at E1 i.e. higher price and
lower quantity.
S’
S
E1
E
With the same example: Let Qd= 20-2P and Qs = 4+2P
The Equilibrium is , Qd = Qs , 20-2P = 4+2P or 16 = 4P, P = 4, Q = 12
Now if Government imposes tax on consumer, taka 3 for per unit. What will be the
equilibrium?
The Demand function after tax is Q1d = 20 - 2(P+3) = 20 - 2P -6 = 14 -2P
New equilibrium, 14 -2P = 4 + 2P or, 10 = 4P or, P = 2.5, but the consumers have
to bear taka 3 as tax so the price would be 5.5 and Q would be 9.
The implication of tax is that P goes up to 5.5 from 4 and equilibrium quantity
decreases to 9 from 12. So the new equilibrium is attained at higher price and
lower quantity. In figure new equilibrium is attained at E1 i.e. higher price and
lower quantity. S

5.5
E
4
2.5

9 12
Please solve the following:
1.D = 20 -4P, S = 4 + 4P, determine equilibrium price and quantity. What happens
when 5% sales tax is imposed on sellers.
2.D = 20 -4P, S = 4 + 4P, determine equilibrium price and quantity. What happens
when subsidy per unit is taka 2.
3.D = 150 -3P, S = -40 + 4P, determine equilibrium price and quantity. What
happens when 4 taka unit tax is imposed on sellers. How much tax is borne by
consumers? How much tax is borne by sellers? What is the revenue of the
Government?
4.Demand function : 35-Q = 3P, Supply function : Q + 30 = 2P2, determine
equilibrium price and quantity.
5.D = 50 - 2P, S = -10 + 3P, determine equilibrium price and quantity. What
happens when 10% sales tax is imposed on sellers.