University of Balamand

Faculty of Business & Management

Survey of Economics

Supply, Equilibrium, Disequilibrium:

 Supply:
The supply curve/schedule/function/ shows the relationship between the market
price of a commodity and the quantity that producers are willing and able to supply,
ceteris paribus.

P QS 6 P
S
1 2 5

4
2 4
3
3 6
2

4 8
1

5 10 0 Q
0 2 4 6 8 10 12

 Law of supply:
S curve slopes upwards = slope is positive.
P and QS are positively/directly related.
As P increases, cet par, QS increases P and QS move in the same direction. Graphically, a change
As P decreases, cet, par, Qs decreases in P leads to a movement along the same curve.

 Reason behind the law of supply:

The pursuit of profits.

 Market:
It is a system or mechanism (not necessarily a physical place) through which
consumers and suppliers interact. (at every P we some up the Q)

 Equilibrium:
Graphically, it is the point of intersection between market demand and market
supply of a certain good.
Market D (or S) is the horizontal summation of all individual D curves (or S) in a given
market.
Equilibrium price is the price at which consumers demand just as much as suppliers
supply = it is the price at which QD = QS
It is also called the “market clearing price” (no excess demand nor excess supply).
At equilibrium, the market is in balance, there’s stability: no need for anything ar
change if nothing else changes.
University of Balamand
Faculty of Business & Management
Survey of Economics

 Finding Equilibrium:
1. Graphically: it is the point of intersection between the market D and the
market S curves.
2. From the schedule: locate the P where QD = QS (market)
3. Algebraically: (from the functions)
Set QD = QS  get P then replace in either equations to get Q.

 Disequilibrium:
Any price other than P* leads to disequilibrium: QD>QS or QS>QD which is unstable. A
case of instability leads to market adjustments so that stability gets restored.

 Case of Surplus: if P>P*

At such a high price, suppliers are willing to supply more than what
consumers are willing to buy (QS>QD)  there will be stocks of unsold
inventories. It is a case of disequilibrium and instability: a case of surplus.
The market will adjust to restore stability: there will be downward pressure
on the price.
As P decreases, QD increases (law of demand) and QS decreases (law of
supply) until they equalize at equilibrium.
Amount of surplus = QS - QD

 Case of Shortage: if P<P*

At such a low price, consumers are willing to buy more than what suppliers
are willing to supply (QD>QS)  sales are brisk. It is a case of disequilibrium:
shortage.
There will be market adjustments to restore stability. There will be upward
pressure on the price. As P increases, QD decreases and QS increases (laws of
D and S) until they become equal at equilibrium.
Amount of shortage = QD - QS