Page 243 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes in supply. So demand and supply are two opposing forces which move opposite to each other.
Where they are equal, price is determined and that price is known as equilibrium price. At this price,
quantity purchased and sold is known as equilibrium quantity. When the price is less or more than the
equilibrium price, then equilibrium production deviates which finally settles equilibrium price. This
process of price determination is evident in Table 1 and Fig.12.1.
The following table depicts schedule of demand and supply of applies when the price is 10 per kg.
Then demand of apples is 120 kg and supply is 20 kg.

Table 1: Demand Supply Schedule
Price in rupees Quantity Demanded Quantity Supplied
10 120 20
20 100 30
30 80 45
Equilibrium Price → 40 60 60 ←0 Equilibrium Quantity
50 40 80
60 20 120

Rise in price leads to decrease in demand and increase in supply. When the price is 40 per kg, then
both demand and supply are 60 kg. This is equilibrium quantity, which determines equilibrium price
is 40 kg. Once equilibrium price is fixed, it has no tendency to change. If at any time, price becomes
more or less than 40 then forces of demand and supply will bring it again on 40. For example, if price
reduces from being 40 to 30, then demand will increase to 80 kg and supply will decrease to 45 kg.
More demand for small quantity of apples will increase competition in buyers leading to rise in price to
40. This will result in decrease in demand to 60 kg and supply will increase to 60 kg. So equilibrium
price is established again. In contrast when price will be 50, then demand will be 40 kg and supply will
be 80 then every seller tries to sell his product first, so he reduces the price and others also follow till
the price becomes 40 and equilibrium between the demand and supply is again established.

Fig. 12.1

Price D S 1

d s
(` 50) P
1
(` 40) P E
s 1 d
(` 30) P 1
2
S D
1
O Q
Quantity

Figure 12 .1 depicts equilibrium price and production, where DD is demand curve and SS is supply
1
1
curve. Both intersect at point E, which is the equilibrium point. OP is equilibrium price at which
equilibrium quantity OQ is sold and purchased. If price reduces from OP to OP then demand increases
2
from P d > supply P S which increases the demand of s d . To increase the supply rather than demand
2 1
2 1
1 1
creates competition among buyers leading to increase in price from OP to equilibrium price OP. If
2
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