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Now we will see how we graphically, we can explain the relationship between the price and the quantity supply, that through a supply curve. And supply curve is a graph of the relationship between the price of goods and quantity supply. So, mathematically we do this through a supply function, what is the exact quantity at the different price, and the quantity demanded. And graphically we will see how the supply curve will look like, assuming that the law of supply is valid that there are positive relationship between the price and the quantity supply.

So, if you look at, if you are taking directly data from the supply schedule, y axis gives us the price of ice cream cone and x axis gives us the quantity of ice cream cone. So, in the price, you start from 0, then it is 0, then 0.5, 1, 1.5, 2, 2.5, 3, price is increasing; and with the increase in the price, the quantity supply is also increasing. So, if the price is 0, quantity is 0; if the price is 0.5 again quantity is 0.5. And similarly, when price is 1, each point, each bullet point on the curve that shows a price and quantity supply combination. So, since they are positively related with each other, price and quantity supply, the supply curve is always upward sloping, because there is a positive relationship between the price and quantity supply.

More is the price, more is the quantity supply; less is the price, less is the quantity supply. So, as contrast to the demand curve which is always downward sloping, because the basis is inverse relationship between the price and quantity demanded , in case of supply there is always a positive relationship between price and quantity supply; and that is the reason, the supply curve is always upward sloping and is got a positive slope.

So, now, we will see what are the factors that decides the quantity supply. As you have already discussed, price, input price, technology, expectation and number of sellers; these are the factors, or these are the determinants of the quantity supply. So, we know that supply curve is upward sloping and it has a positive slope. But when there is a change in, any of these factors which determines the quantity supply; whether it is price, whether it is input price, whether it is technology, whether it is expectation of the future price, number of sellers or may be the, the price of the related goods in the market, whenever there is a change in the, those, one of those variable, how there is a change in the supply.
So, the logic is again uniform like, in case of demand curve, if there is change in the price, the change in quantity supply is just from one point to another point, but if the change is because of non price determinant if there is a change in the input price, there is a change in the technology, or change in the any other non price determinant, the supply curve will shift to the right, or shift to the left. If it is shift to the right, in case of increase; it shift to the left, in case of decrease.

So, this is the shift in the supply curve. Initially the supply curve is S 0. Supply increases so, supply curve moves to right S 1; supply decreases s and supply curve moves to left S.So, shift in the supply due to non price determinant, not due to change in the price, rather due to change in the other factors which influence the supply, it, because of the that quantity supply is increasing, the supply curve will shift from S 0 to S 1, to the right. Because of those variables if supply is decreasing, the supply will move to left, the shift in the supply is to the left, and that is from S 0 to S 2.

What will happen, if there is a change in the price? So, if you look at, this is our supply curve. Here we take the price, here we take the quantity supply. So, in the previous slides as we have seen that if there is a increase in the supply, then supply curve will shift to the right; if there is a decrease in the supply, supply curve will shift to the left. So, this is in the case of increase in the supply, this is in the case of decrease in the supply. Now, what will happen exactly when there is a change in the price? These two scenario exist, when there is a change in the supply due to non price determinant of the supply.

Now there is a change in the price, suppose this is, this is the original supply curve and we get different points like, this is, suppose P 2 Q 2, Q 3 P 3, Q 4 P 4. So, price is P 2, quantity demanded is Q 2. If price increases from P 2 to P 3, quantity demanded increases from Q 2 to Q 3; if price increases from P 3 to P 4 again there is a increase in the quantity demanded from Q 3 to Q 4. So, if you look at this is one price of quantity supply condition, this is second price quantity supply condition, and this is third price quantity supply condition.
Now, what will happen when there is a change in the price? So, this is price and quantity supply condition, if there is a change in the price; if the price is increasing from P 3 to P 4, the movement is only between, only between the supply curve, between two different points of supply curve that is from point A to point C.

And if there is a decrease in the price, again suppose from P 4 to P 3, the movement again is along the supply curve from the point B to C. So, two points to remember again in case of supply also, if the quantity supply is increasing due to change in the price of price, or quantity supply is decreasing due to change in the price, the movement is along the supply curve. And if the quantity supply is increasing due to non price determinants, then there is a shift of the supply curve to the right. And if the quantity supply is decreasing due to non price determinants, the shift is to the left, of the supply curve.

So we have discussed about the demand, we have discussed about the supply; these are the two market forces generally , that governs the market mechanism, or that may be, the principle of market, demand forces or the supply forces leads to the, may be the working of the market system. Now, we will see, how they reach to the equilibrium or how the market reaches to the equilibrium. Assuming demand behaves in the similar manner, how we have discussed; and supply behaves in the similar manner, how we discussed just a couple of minutes back.

Now what is market equilibrium? Before analysing that, how the demand force behaves, or how the supply forces behave, what is market equilibrium? Equilibrium refers to a situation in which price has reached the level where the quantity supplied also equals to quantity demanded.

So, if you look at, if you plot now both the market demanded, and market supply in the graph. Let us consider this as quantity supply, quantity supply, quantity, may be demanded or may be this is quantity, this is price. Demand curve is downward sloping, supply curve is upward sloping. Demand curve is downward sloping because there is a inverse relationship between the price and quantity demanded; and supply curve is upward sloping because there is a positive relationship between the price and quantity supply. Now, the point at which demand curve intersect the supply curve, this is the point of equilibrium; and this is the equilibrium price and this is the equilibrium quantity. Or sometimes we use the word interchangeably market clearing price and market clearing quantity.

Now, so if what is equilibrium? Equilibrium is a situation where the price has reached that level where the quantity supply is just reached equal to the quantity demanded. So, the equilibrium price is one, or the price is one where at that price whatever the supplier wished to or would like to supply in the market that is the, exactly equal to the whatever the consumers demand from the market for that typical product. And corresponding to that, that typical quantity is known as the equilibrium quantity; and that typical price is known as the equilibrium price. So, equilibrium is a situation where equilibrium price, the price reach to such a level where the quantity supply by the supplier is just equal to the demand by the consumer.

So, market equilibrium is generally leads to equilibrium price and equilibrium quantity. And it is determined by the intersection of demand and supply curve. And at the point of intersection, as we have seen in the graph, the quantity demanded is just equal to the quantity supplied. At this point, consumer can purchase all they want and producer can sell all they want, at a market clearing price. So, the equilibrium price is also known as the market clearing price A and at this price, consumer can purchase all they want and producer can sell all they wish to sell in the market, at the market clearing price.

So, equilibrium point is one, for the price level has reached such a level where the quantity supply is just equal to the quantity demanded. So, corresponding to the intersection point of the demand curve and supply curve we get the equilibrium point; corresponding to that point on the x axis gives us the equilibrium quantity, and point on the y axis that gives us the equilibrium price. At this price, consumer can purchase whatever they want, and producer can sell whatever they want, in term of the quantity.

Now we will just extract whatever demand schedule, we discussed during, the discussion of demand, and supply schedule when we discussed during the, when we are trying to intersect the concept of supply. So, if you remember the first part gives us the demand schedule, price and quantity there, negatively related, they are inversely related to each other. And second part gives us a supply schedule where price and quantity demanded they are positively related. So, if you look at carefully, the schedule, both the demand schedule and the supply schedule; at rupees 2, the total market supply is equal to the total market demand. So, the rupees 2, the total market demand is 7 units; and at rupees 2 the total market supply is 7 units. So, we can say, rupees 2 is the equilibrium price or the market clearing price, where the quantity demanded is equal to the quantity supply ; and 2 rupees as the equilibrium price and 7 unit as the equilibrium quantity.

So, graphically, this is the equilibrium of supply and demand. As we discussed, supply curve is upward sloping, demand curve is downward sloping. The point at which demand curve intersects the supply curve is become the equilibrium point. Corresponding to that we get the equilibrium price, and, in the y axis; and we get the equilibrium quantity in the x axis. So, equilibrium quantity is 7 units and equilibrium price is 2 rupees basically in this case. But the demand is equal to supply, there is a market reaches the equilibrium. How long this can continue? How long can the demand be equal to supply?

May be a situation arises where there is a surplus in the market, because quantity supply is more than quantity demanded. And sometimes it happens that, there is a shortage in the market because quantity demand is more than the quantity supply. So, till the time demand is equal to supply, there is equilibrium. But there is also a deviation from the equilibrium at any point of time, if quantity supply is more than quantity demanded or quantity demanded is more than the quantity supply.
I will take the first case, where the quantity supply is more than the quantity demanded. And this situation is generally known as the surplus situation; and how this happens? When the price is greater than equilibrium price, quantity supply is more than quantity demanded, because, the price is more than the equilibrium price. Price and quantity supply they are positively related; more is the price, more is the quantity supply. So, at any point of time, the price charge in the market is greater than equilibrium price, then the quantity supply is greater than quantity demanded, which leads to excess supply or surplus in the market.
And how to come out, again, how to come out of the surplus situation and reaches the equilibrium? Producer try to lower the price, to increase the sales, and that leads to again the equilibrium. So, this is the case where if you look at, the supply is more than the demand; and why supply is more than the demand? Because, the price is more than equilibrium price, that leads to a situation of surplus, and how to come back to the equilibrium again, the supplier will reduce the price. And if the supplier is reducing the price, as the basis of law of demand, whenever there is a decrease in price that leads to increase in the quantity demanded. So, supplier will lower the price, that will lead to lowering the quantity supply; as contrast to that, that will increase the quantity demanded, because price is decreasing; and that will lead to, again that will lead to a situation where the quantity demanded is equal to quantity supply; and market will reach to the equilibrium.

The second situation is shortage. When price is less than equilibrium price, then the quantity demanded is greater than quantity supplied. So, this is the second type of situation when the price goes below the equilibrium price. And what the law of demand says? If there is a decrease in the price, there is a increase in the quantity demanded. So, the same thing happens over here. When the price is less than equilibrium price, the consumer will demand more, because price is on a lower side, that leads to the increase in the quantity demanded; and quantity supply decreases because price is low; and since price and quantity supply is positively related, the supplier will also reduce the supply. So, more is the quantity demanded, less is the quantity supply; and that leads to a increase in the quantity demanded and decrease in the quantity supply. So, price is greater, price is less than the equilibrium price; quantity demanded is more than quantity supply.
Now, what is the outcome? Outcome is. that is a excess demand or a shortage. Now, how to come out of this situation? And how to reach equilibrium? Again supplier will increase the price, if there is a increase in the price, that reduces the quantity demanded, again the basis is law of demand. Increase in the price, leads to decrease in the quantity demanded; increase in the price on the other hand increases the quantity supply. So, that leads to again to a equilibrium because, supplier is increasing the price, that will increase the quantity supply, also that will decrease the quantity demanded. So, again the equilibrium will be raised when the quantity demanded is equal to quantity supplied. And here the, here to come out of this shortage situation, again there is a, again there is a initiative by the supplier to increase the price.

So, graphically this is the representation of the, graphically this is the representation of the excess supply where the supply is more than demand and there is surplus situation.

How it happens? So, initially the equilibrium point is 7 units, equilibrium price is 2 rupees; if price is 2.5 which is more than equilibrium price, the supplier increases from 7 units to 10 units; and the demand decreases from 7 unit to 4 units. The gap between the 4 units and 10 units that is the surplus, because the quantity supply is more than quantity demanded.

Then, the second situation, excess demand, the graphical representation of that; price is decreased from the equilibrium price So, equilibrium price is two; price is decreased from 2 rupees to 1.5, less is the price, more is the demand; 1.5 is the price, 10 units is the demand, sorry, yes, 10 units is the demand.

And what happens to supply? Supply decreases from 7 units to 4 units. Because less is the price, less is the quantity supply. The gap between the 4 units quantity supply and 10 units quantity demanded, that leads to shortage in the market. And again how to come back to the equilibrium? Again here, the supplier will increase the price, which leads to increase in the quantity supplied, and leads to decrease in the quantity demanded, and which will eventually lead to the equilibrium between the quantity supplied and the quantity demanded.

Now, we will see, what happens when there is a change in the demand? And, when there is a change in the supply? So, if you look at, 7 is the equilibrium quantity, 2 is the equilibrium price. Now suppose demand increases, why there is a increase in the demand? So, this is the case of a price of ice cream cone again. Hot weather increases the demand for ice cream; demand increases from D 1 to D 2. And what is the, what is the change in the quantity demanded? The change in the quantity demanded is 7 units to 10 units.

What happens to price? Since, if there is more demand, the supplier will increase the price. So, price increases from 2 rupees to 2.5; and again quantity also increases from 7 units to 10 units. So, supplier is the constant, if there is a increase in the demand, that leads to increase in the price and also increase in the quantity demanded.

Then, we will see that, how there is a decrease in supply? How it effects the equilibrium. So, initially, demand curve is given by demand; supply curve is given by S 1; initial equilibrium is at 7 units, suppose there is a technical failure and that reduces the supply of the ice cream, leads to decrease in the supply; decrease in the supply leads to shift in the supply curve from S 1 to S 2. New equilibrium point, the quantity is 4, the price is 2.5. So, a technical failure reduces the supply of ice cream, which results in a higher price, because supply is less and demand remains constant; and price increases from 2 to 2.5 and quantity decreases from 7 units to 4 units. So, whenever there is a decrease in the supply, that leads to increase in the price, and increase in the, decrease in the quantity demanded.

Next we will see, what is the shift in the both supply and demand, in the next session. Because till now, we are just looking at, what happens when the supply remains at constant demand, increases or decreases, and when demand remain constant, when there is a decrease or increase in the supply, what happens to the price, equilibrium price? And, what happens to the equilibrium quantity?
So, in the next session, we will see, when there is a simultaneous shift in the both supply and demand, what happens to the equilibrium price, what happens to the equilibrium quantity. And the movement in the price and quantity demanded, in which direction whether it increases or whether it decreases.

In continuation to our last session on theory of demand where we discussed about demand and supply and market equilibrium, today we will start our session on, this again demand supply market equilibrium, particularly how the equilibrium changes, when there is a change in the demand and supply, or when there is a simultaneous change in the demand and supply. And then later part of the session we will introduce the concept of elasticity of demand which is in the second part of this module theory of demand. And we will cover different type of price, different type of elasticity of demand, like price elasticity of demand, income elasticity of demand and cross price elasticity of demand.

So, to start with, let us have a quick recap, what we did in the last session, or what we covered in the last session. We discussed about the change in the demands. So, change in demand either due to change in the price, or due to change in the non-price determinants. Then we introduced the second market forces that is supply. Then we covered the law of supply. And taking the demand forces and market forces, we analyzed the condition of market equilibrium; and how the market equilibrium changes when there is a change in the demand or change in the supply.

So, today we are going to look at, what happens when there is a simultaneous shift in the both the demand, both the market forces that is demand and supply forces. So, the previous class, if you remember, we discussed about change in the demand or change in the supply. So, we will say the, we will check in this case, when there is a shift in both supply and demand, what happens to the equilibrium price? And, what happens to the equilibrium quantity? So, if you look at, initially the demand curve is D 1, supply curve is S 1; the equilibrium quantity is Q 1 and equilibrium price is P 1.

In the y axis, we are considering the price of ice cream cone, ice cream cone is the goods over here; and in the x axis, we are considering the quantity of ice cream cone. So, if you look at, when there is a change in the demand, the demand curve moves from D 1 to D 2; and when there is a change in the supply, there is a, its movement from S 1 to S 2. So, in this case, there is a increase in the demand, that leads the demand curve from D 1 to D 2; and there is a decrease in the supply that leads the demand curve from S 1 to S 2. Corresponding to the new level of demand and new level of supply, that is D 2 and S 2 ,we get the new equilibrium price as P 2, the point corresponding to y axis; and we get the new quantity as Q 2, the point corresponding to x axis.
Now, if you look at here, the increase in the demand is greater than the decrease in the supply. So, demand and supply both are changing, both are changing in the opposite direction; demand is increasing, supply is decreasing, and that leads to a scenario where at the new equilibrium, there is both increase in the price and increase in the quantity. So, we can say that, when there is a increase in the demand and decrease in the supply, the equilibrium price and quantity, both increases. But point to remember here is that, increase in the demand is more than decrease in the supply.

Similarly, if you take a case where, there is a change in the supply, and also there is a change in the demand. So, if you look at here, there is a increase in the demand from D 1 to D 2, and decrease in the supply is from S 1 to S 2. Initially equilibrium is, initial equilibrium price is P 1, initial equilibrium quantity is Q 1 . Increases, in the demand, the leads the demand curve from D 1 to D 2; decrease in the supply leads the, decrease in the supply from S 1 to S 2; that leads to increase in the price, equilibrium price from P 1 to P 2, P 2 corresponding to the new equilibrium between S 2 at the supply curve, and D 2 is the demand curve.

However, in this case if you look at, there is a decrease in the quantity demanded, even if there is a increase in the demand. The reason what we can site over here is that the decrease in the supply is greater than, increase in the demand, and that leads to the fact that with a new equilibrium, new equilibrium point, the equilibrium quantity is decreasing from Q 1 to Q 2. So, when supply is decreasing, demand is increasing; and the decrease in the supply is greater than increase in the demand. In this case, at the point of new equilibrium, equilibrium price increases; however, there is a decrease in the quantity demanded.

So, this is two cases, these are the two cases, what we discussed in the, when there is a simultaneous shift in the, both the demand and supply. So, how we are going to summarize this? Either in what direction the price changes, or in what direction, the quantity changes. But we cannot predict the direction for both the price and quantity, when there is a simultaneous shift in the demand and supply. So, to simplify this, how we can put it? We can say that, when there is a both decrease or increase in demand and supply, in that case, we can only predict, what will be the change in the quantity, when the demand and supply moves in this direction; or what will be the change in the price, when the demand and supply, moves in a particular direction.

So, the change in the equilibrium price or quantity said to be in determinant, when the direction of change depends on the relative magnitude by which demand and supply shift. So, we cannot say, if demand increases supply decreases, price has to be this, or price has to be that; till the time that increase in the demand or decrease in supply is not uniform. Since there is a change in relative magnitude by which the demand is decreasing, or the supply is increasing, it happens that the equilibrium price and equilibrium quantity becomes in determinant.

So, quickly if we can summarize that, what happens to price and quantity when supply or demand shift. And with this particular table if you look at, we have summarized all the scenario, where the , when there is a change in the demand, either in the increasing direction or decreasing direction, or when there is a change in the supply, either increasing or decreasing, what happens to price and quantity? So, price is refer here as P and quantity refer here as Q. So, if you look at the first column and first row, there is no change in the demand, the first box, that is no change in the demand, no change in the supply, P remains same, Q remains same.

Then coming to the second row, again the first box has come increase in demand, no change in the supply; price is increases and quantity also increases. It decrease in the demand and no change in the supply, price is decreasing, quantity is also decreasing. There is no change in the demand, but there is a increase in the supply, that leads to increase in, decrease in the P and increase in the Q. But if you look at interestingly the middle box, which, where, where we are going to analyze, what happens when there is a increase in the supply, also increase in the demand. In this case, we can only predict the, equilibrium price and equilibrium quantity, we cannot predict both. And in this case, it has happened that P remain ambiguous and Q is increasing. And similarly when there is a increase in the supply and decrease in the demand, P decreases and Q remain ambiguous.

Similarly, if you come to the third row, and here there is no change in the demand, decrease in supply, P is increasing, Q is decreasing. But when there is a simultaneous change in the both, demand and supply, if you look at the last row second box, there is a decrease in the supply and increase in the demand, we can only decide, we can only predict, what will happen to P here, and P is increasing and there is a ambiguity regarding the change in the Q. That happens in the last box, the last row last column when there is a decrease in the supply and increase in demand that leads to ambiguity for the, change of P, but the Q generally decreases.

So, to summarize this, we can say that, when there is a, when there is both demand and supply changing, either we can predict about P that is the price, or we can predict about quantity. And the other variable, that is ambiguity regarding the other variable, we cannot predict both, in which direction they are going to change. But when there is only change in one market forces, either demand or supply, we can predict about both the price and quantity, in which direction they are going to move. So, till now, we discussed about, if you remember this, this, when we started this module theory of demand, we started our discussion on, like, what is the need for the market, typically the market forces, what is the need? And if you look at the requirement or the mechanism, how the market was, that depends up on the demand forces and supply forces. That is the main justification when we introduced the concept for demand forces and the supply forces.

So, if we quickly summarize, what we discussed in the last two sessions, typically on market demand, market supply, and market equilibrium. And the first point is, demand curve shows, how the quantity of good depends upon the price. According to law of demand, the price of good decreases, the quantity demand increases, and that is the reason demand curve slope S downward. Or, in other word we can say, other things remaining constant, there is a inverse relationship between the price and quantity demanded, that is the reason the slope of the demand curve is negative.

In addition to price, there are few other factors also which influence the demand, like income of the consumer, the prices of complements and substitutes, the taste and preference of the consumer, expectations, and the number of buyers in the market. And whenever there is a change in any of these factors, apart from price, the demand curve shift. But whenever there is a change in demand due to change in the price, the change in the demand curve is reflected only from movement from one point to another point in the demand curve.

Then we introduced the concept of supply curve, supply. Supply curve shows how the quantity of good supplied depends upon the price. And according to law of supply, the price of the product and quantity supply of the product, they are positively related; and that is the reason, the slope is positive and supply curve is one upward sloping.

Then, in this case also, apart from price, there is some other determinants which influence, which influence the supply, like the input price, the technology, or the technological advances, the expectation of future price of the product, and the number of sellers those are operating in the market, these are other factor that influence, influence the supply. And whenever there is a change in the price, again it gets reflected in the supply curve through the movement from one point to another point in the supply curve. However, if there is a change in the other factor and that leads to change in the supply, generally the supply curve shift to the right, if it is a case of increase; or shift to the left, if it is a case of decrease.

Then we identified the condition for market equilibrium. And if you remember, the market equilibrium is determined by the intersection of the demand curve and the supply curve. At the equilibrium price, or the so called market clearing price, the quantity demanded of the market is exactly equal to the quantity supplied. And, even if there is a mismatch, at an