Lecture on Supply and Demand Equilibrium

Introduction

• Equilibrium: The point where quantity demanded equals quantity supplied.
• Law of Supply and Demand: Market price adjusts to balance supply and demand.

Graphical Representation

• Supply Curve: Positively sloped – relationship between price and quantity supplied.
• Demand Curve: Downward sloped – relationship between price and quantity demanded.
• Intersection: Represents the equilibrium price and quantity.

Equilibrium Details

• At equilibrium, no additional quantities are exchanged.
• Cost of production rises but consumers’ willingness to pay decreases beyond equilibrium.

Disequilibrium

• Surplus: Quantity supplied > Quantity demanded.

  • Occurs when the price is above equilibrium.
  • Encourages producers to supply more and consumers to buy less.
  • Calculation: Difference between quantity supplied and quantity demanded (e.g., 6 units surplus).
  • Correction: Price decreases until equilibrium is restored.

• Shortage: Quantity demanded > Quantity supplied.

  • Occurs when the price is below equilibrium.
  • Encourages consumers to buy more and producers to produce less.
  • Correction: Price increases, leading to more production and less consumption until equilibrium is restored.

Invisible Hand

• Market Correction: The invisible hand guides the market back to equilibrium during disequilibrium situations.
• Dynamic Adjustment: Prices adjust to ensure supply matches demand over time.

Conclusion

• Equilibrium is a dynamic state, with the market self-correcting through price adjustments driven by supply and demand forces.