Supply and Market Equilibrium: Supply, Determinants, Elasticity and Price Determination Questions

Q: Explain market equilibrium and price determination.

Market equilibrium is achieved when **quantity demanded equals quantity supplied** at a price called equilibrium price. If market price is below equilibrium, **shortage** occurs (Qd>Qs) and price tends to rise. If price is above equilibrium, **surplus** occurs (Qs>Qd) and price tends to fall. Through these adjustments, market price moves towards equilibrium.

Question 1

Define supply.

Accepted Answer

Supply means willingness and ability of sellers to offer a commodity for sale at a given price and time.

Question 2

State the law of supply.

Accepted Answer

Other things remaining constant, quantity supplied increases when price rises and decreases when price falls.

Question 3

What is supply schedule?

Accepted Answer

Supply schedule is a table showing quantities supplied at different prices.

Question 4

Define elasticity of supply.

Accepted Answer

Elasticity of supply is the degree of responsiveness of quantity supplied to a change in price.

Question 5

What is equilibrium price?

Accepted Answer

Equilibrium price is the price at which quantity demanded equals quantity supplied in a market.

Question 6

What is shortage?

Accepted Answer

Shortage occurs when quantity demanded is greater than quantity supplied at a given price.

Question 7

Explain determinants of supply.

Accepted Answer

Supply is affected by **cost of production** (input prices), **technology** (improves output and lowers cost), **government policy** (tax reduces supply, subsidy increases), and **number of sellers** in market. Prices of related goods (substitutes in production), weather conditions (agriculture) and expectations of future prices also influence supply. Changes in these factors shift supply curve.

Question 8

Differentiate between movement along supply curve and shift of supply curve.

Accepted Answer

Movement along supply curve occurs due to **change in price** of the commodity and is called **extension** (price rise) or **contraction** (price fall). Shift of supply curve occurs due to **change in other factors** like cost, technology, taxes/subsidies, number of sellers etc. It causes **increase in supply (right shift)** or **decrease in supply (left shift)**.

Question 9

Explain elasticity of supply and its types.

Accepted Answer

Elasticity of supply measures responsiveness of quantity supplied to price changes. If **Es>1**, supply is elastic; if **Es<1**, supply is inelastic; if **Es=1**, supply is unitary elastic. At extremes, **Es=0** indicates perfectly inelastic supply and **Es=∞** indicates perfectly elastic supply. Elasticity depends on time period, storage and factor mobility.

Question 10

Explain market equilibrium and price determination.

Accepted Answer

Market equilibrium is achieved when **quantity demanded equals quantity supplied** at a price called equilibrium price. If market price is below equilibrium, **shortage** occurs (Qd>Qs) and price tends to rise. If price is above equilibrium, **surplus** occurs (Qs>Qd) and price tends to fall. Through these adjustments, market price moves towards equilibrium.

Question 11

Explain effect of increase in demand on equilibrium price and quantity.

Accepted Answer

When demand increases (demand curve shifts right) and supply remains unchanged, at the old price there is shortage (Qd>Qs). This pushes the price up. Higher price encourages more supply and reduces demand until a new equilibrium is reached at **higher equilibrium price** and **higher equilibrium quantity** (general case).

Question 12

Explain effect of increase in supply on equilibrium price and quantity.

Accepted Answer

When supply increases (supply curve shifts right) with demand unchanged, at the old price there is surplus (Qs>Qd). This forces price down. Lower price increases quantity demanded and reduces quantity supplied until new equilibrium is reached at **lower equilibrium price** and **higher equilibrium quantity** (general case).

Question 13

Define supply and explain law of supply. State reasons and exceptions to the law of supply.

Accepted Answer

Supply means the willingness and ability of sellers to offer a commodity for sale at a given price and time. Supply is not mere stock; it is the amount actually offered for sale.

**Law of supply:** Other things remaining constant (ceteris paribus), quantity supplied increases when price rises and decreases when price falls. Thus price and supply are directly related.

**Reasons for law of supply:** Higher price increases expected profit, so producers are willing to produce and sell more. Also, to produce more output, firms often face rising marginal cost because less efficient resources are used; therefore higher prices are required to cover higher costs. In the long run, higher prices and profits attract new firms into the industry, increasing supply.

**Exceptions:** In the very short period, especially in agriculture, supply may not respond immediately due to time lag. For perishable goods, sellers may supply more even at lower prices to avoid spoilage. For rare goods with fixed supply, quantity cannot increase with price. In labour market, at very high wages supply may bend backward in some cases.

Hence, law of supply generally holds but may not apply under special situations.

Question 14

Explain elasticity of supply. Discuss factors affecting elasticity of supply.

Accepted Answer

Elasticity of supply measures the degree of responsiveness of quantity supplied to a change in price. It is expressed as Es = (% change in quantity supplied) / (% change in price). Supply can be elastic, inelastic, unitary, perfectly elastic or perfectly inelastic depending on the responsiveness.

**Factors affecting elasticity of supply:**
1. **Time period:** Supply is more elastic in the long run because firms can expand capacity and new firms can enter; it is less elastic in the short run.
2. **Nature of commodity:** Agricultural and perishable goods have less short-run supply response due to time and spoilage.
3. **Availability and mobility of factors:** If factors of production are easily available and movable, output can be increased quickly, making supply more elastic.
4. **Storage facilities:** If a commodity can be stored easily, sellers can adjust supply over time, increasing elasticity.
5. **Excess capacity:** Firms with idle capacity can increase output without large cost increase, leading to more elastic supply.

Thus, elasticity of supply mainly depends on production conditions, time and flexibility of resources.

Question 15

Explain market equilibrium and price determination with the help of demand and supply. Also explain effects of shifts in demand and supply on equilibrium.

Accepted Answer

Market equilibrium is the situation where quantity demanded equals quantity supplied at a particular price. The equilibrium price is the market-clearing price at which there is neither excess demand nor excess supply.

**Price determination:** Price is determined by the interaction of demand and supply. If market price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage. Buyers compete to purchase the limited supply, pushing price up. If market price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Sellers compete to sell their unsold stock, forcing price down. These adjustments continue until Qd equals Qs.

**Effect of shifts:** If demand increases (right shift) with supply unchanged, shortage occurs at old price and equilibrium price rises; equilibrium quantity also increases. If demand decreases, equilibrium price and quantity fall. If supply increases (right shift) with demand unchanged, equilibrium price falls and equilibrium quantity rises. If supply decreases, equilibrium price rises and equilibrium quantity falls.

Therefore, changes in demand and supply conditions cause changes in equilibrium price and equilibrium quantity.

Supply and Market Equilibrium: Supply, Determinants, Elasticity and Price Determination

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