Equilibrium Price and Quantity

Equilibrium occurs at the intersection of the market supply and market demand curves.At this intersection, quantity demanded equals quantity supplied ie., the quantity producers and willing to supply. A surplus exists at prices higher than the equilibrium price since the quantity demanded falls short of the quantity supplied. At price lower than the equilibrium price, there is a shortage of output since quantity demanded exceeds quantity supplied.Once achieved,the equilibrium price and quantity persist until there is a change in demand and/or supply.

Equilibrium price and/or equilibirum quantity change when the market demand and/or market supply curves shift. Equilibrium price and equilibrium quantity both rise when there is an increase in market demand with no change in market supply curve.Equilibrium price falls while equilibrium quantity increases when market supply increases and demand is unchanged.

Supply

A supply specifies the units of a good or service that a producer is willing to supply (Qs) at alternative prices over a given period of time.i.e Qs = f (P). The supply curve normally has a positive (upward) slope, indicating that the producer must receive a higher price for increased output due to the principle of increasing costs. A market supply curve is derived by summing the units each individual producer is willing to supply at alternative prices. A typical market supply curve :-

The supply curve above shows the changes on the quantity supplied. An increase in the quantity supplied by firms shifts the supply curve rightward,whereby a decrease will see a backward shift.

The market supply curve shifts when the number and/or size of producers changes,factor prices such as interest,wages, rent paid to economic resources change,the cost of materials,technological progress occurs, and/or the government subsidization(To be explained soon). A change in supply thereby denotes a shift of supply curve. A change in quantity supplied indicates a change in the commodity's price and therefore a movement along an existing supply curve.