Demand, Supply and Market Equilibrium
- Demand is the quantity of a good buyers are willing and able to buy at each price
- supply is the quantity sellers are willing and able to sell. The law of demand shows an inverse price-quantity relation
- the law of supply shows a direct one. Market equilibrium occurs where Qd = Qs.
In this chapter
Meaning of Demand
Demand is the quantity of a good that a buyer is willing and able to buy at each possible price during a given time. Both conditions must hold: willingness alone is just a desire; ability alone is just purchasing power. In Nepal, a student in Kathmandu may want a Rs 5-lakh iPhone, but only those who can pay have a demand for it.
Difference between Desire and Demand
| Basis | Desire (इच्छा) | Demand (माग) |
|---|---|---|
| Willingness to buy | Yes | Yes |
| Ability to pay | No | Yes |
| Backed by price | No | Yes |
| Example | Wishing for a Mercedes car | Actually booking a Maruti Suzuki Swift |
| Economic concept? | No, only a wish | Yes, an economic concept |
Demand Function
Quantity demanded depends on many factors: price of the good (P), income of the consumer (Y), price of related goods (Po), tastes (T), expectations (E), and number of buyers (N). The demand function summarises this relationship. The law of demand says that, ceteris paribus (other things equal), when price rises, quantity demanded falls — an inverse relation.
Demand function (general → linear)
A demand schedule is a table showing quantity demanded at different prices. A demand curve is the graph of the schedule — it slopes downward from left to right. Example: In Kalimati vegetable market, when tomatoes cost Rs 80 per kg, a household buys 2 kg; at Rs 40 per kg, it buys 5 kg.
Demand schedule for tomatoes (one household, Kalimati)
| Price (Rs/kg) | Quantity Demanded (kg/week) |
|---|---|
| 80 | 2 |
| 60 | 3 |
| 40 | 5 |
| 20 | 8 |
Movement vs Shift in Demand Curve
Movement (extension/contraction) vs Shift (increase/decrease)
- Movement along the curve happens when only price changes — same curve, different point. (extension if P↓, contraction if P↑).
- Shift of the curve happens when a non-price factor changes (income, taste, related-good price, expectations, buyers). Right shift = demand increase; left shift = demand decrease.
- During Dashain, demand for goat meat shifts right at every price — festival effect, not a price effect.
- When LPG gas price rises, demand for induction cook-tops shifts right (substitute becomes relatively cheaper).
Supply — Meaning, Function and Law
Supply is the quantity of a good a seller is willing and able to sell at each price during a given time. The supply function depends on: price of the good (P), price of inputs (Pi), technology (T), expectations (E) and number of sellers (N). The law of supply says that, ceteris paribus, when price rises, quantity supplied rises — a direct relation. The supply curve slopes upward. Example: Farmers supply more tomatoes to Kalimati when the wholesale price rises from Rs 20 to Rs 40 per kg.
Supply function (general → linear)
Market Equilibrium
Market equilibrium is the price at which quantity demanded equals quantity supplied. At this price there is no shortage and no surplus — the market "clears". If price is above equilibrium, supply > demand → surplus → sellers cut price. If price is below equilibrium, demand > supply → shortage → buyers bid price up.
Equilibrium, surplus and shortage
Nepal Example — Dashain Goat Market
Before Dashain, every family wants goat meat for sacrifice. Demand shifts right at every price. With supply unchanged, the equilibrium price of goats in Kalanki / Kirtipur markets rises sharply (sometimes double the normal rate). After Dashain, demand shifts back and prices fall.
Practice Problem
The demand and supply of a T-shirt in a Bhaktapur shop are given by Qd = 120 − 4P and Qs = 20 + 6P (P in Rs, Q in units). Find the equilibrium price and quantity. What happens if the government fixes a maximum price of Rs 6 per T-shirt?
Practice Problem
In Kalimati, the demand for tomatoes is Qd = 200 − 5P and supply is Qs = 50 + 5P. (a) Find the equilibrium price and quantity. (b) A truck strike blocks supply from Terai; supply falls by 30 units at every price (new Qs = 20 + 5P). Find the new equilibrium and compare.
Practice Problem
Using Qd = 200 − 5P and Qs = 50 + 5P (from the previous problem), calculate the surplus or shortage if the government sets (i) a price floor of Rs 20 per kg, and (ii) a price ceiling of Rs 10 per kg.
Quick Revision
- Demand = willingness + ability to buy at each price.
- Law of demand: P↑ → Qd↓ (inverse). Law of supply: P↑ → Qs↑ (direct).
- Movement = price change; Shift = non-price factor change.
- Equilibrium: Qd = Qs — no shortage, no surplus.
- Above equilibrium → surplus; below → shortage.
- P* = (a − c) / (b + d) for linear Qd = a − bP and Qs = c + dP.