 Welcome to the second session of module 2, module 2 talks about specifically theory of demand. And in the previous class, we discussed about the nature and behavior of mainly two market forces, like we introduced the concept of demand. And in today's class, we are going to take some of the behavior of the demand typically, how the law of demand works, how the law of demand, what is the law of demand, in which case it is applicable, and also what are the forces that influences this demand. So, if you look at, if you go quickly, whatever we have done in the last session, so a quick recap of that is that, we define the demand, how one of the important market forces is demand, and what is the role of demand in the market. Then, we discussed the law of demand and different scenario, different situation, where the law of demand does not applicable, and there are, and again we discussed the different factors that influence the demand. And market demand also always the summation of the individual demand, that is the last topic, what we discussed in the last session. Today's class, we will see that, how there is a change in the demand. Till now, we have understood that demand is basically, there is a inverse relationship between the price and quantity demanded, and it gets influenced by few other factors like price of related goods income, the consumer, expected future price of the product, number of consumer in the market, and also the taste and preference by the consumer. Now, we will see why there will be change in the demand, whether this is due to change in the price associated with the product, or due to change in the other factors, those influence the demand. So, change in the demand is because of two reasons. One, when there is a change in the quantity demanded, and it occurs when there is a change in the price, and this change is generally reflected through a movement along the demand curve. And second one, when there is a change in the demand, it occurs when one of the other variables like determinants of demand, just now we are discussing the price of the related goods, or the consumer's income, or expected future price of the product, or any other factor, the non-price determinants, any other factor which is not price, if there is a change in those variables, that leads to change in the demand. So, if you look at between these two, the first one is change in the quantity demanded, because this is due to change in the price, and second one is the change in the demand, because of all other factors changing. So, the basic difference between these two if you look at, one we can represent along the demand curve, and the second case we cannot reflect the changes due to other factor along the demand curve, either the demand curve has to shift to the right or shift to the left. So, if why there is a change in the demand curve, either there is a change in the price, that leads to change in the quantity demanded, or there is change in the price of related goods, change in the consumer income, change in the taste and preference of the consumer, expected future price of product is going to change, or there is a change in the number of buyers in the market. So, if you look at in case of change in the price, represent a movement along the demand curve. So, this is between from one point to another point, and in case of income, in case of price of related goods, in case of taste, in case of expectation, in case of number of buyers, generally the demand curve shift to the right, if it is a case of increase, and if it is shift to the left, if it is a case of decrease. So, we will take a quick example, like in the last class also if you look at, we have drawn a demand curve considering P in the y axis and Q in the x axis, Q is quantity and P is price. So, if you take different point here, like suppose this you take P 1, this is P 2, this is P 3, this is P 4, and this is Q 1, Q 2, Q 3 and Q 4. So, you get different combination, and that combination gives us the demand curve. So, if you take all this point, then this is the demand curve. So, we get one combination P 1, Q 1, we get second combination P 2, Q 2, we get third combination P 3, Q 3 and we get four combination P 4 and Q 4. So, if it is a demand curve, now what happens if there is a change in the price? If the price moves from P 1 to P 2, if you look at, there is a change in the quantity demanded from Q 1 to Q 2. So, movement from point A to B, it is because of change in the price. So, in this case also there is a change in the quantity demanded, but the change in the quantity demanded is not moving or not shifting the demand curve, it basically just moving one point to the another point. Suppose, there is a at the same price, the consumer income is increasing. Even if the price is P 1, still the consumer will demand more, because the consumer has more purchasing power to buy the same product, same buy the more quantity at the same price. So, given P 1 fix at this moment, may be the consumer will buy Q 2, because there is a increase in the income of the consumer. So, when there is a change in the income and correspondingly if there is a change in the demand, that means it is the change in the demand is not because of price, the change in the demand is because of any other factor. So, in this case we get a point this. So, even if the price is P 1, the quantity demanded is Q 2. Similarly, even if this price is P 2, the quantity demanded is Q 3. So, in this case if you look at, you get a new demand curve that is D 1 and the shift in the demand curve is because of change in the income. So, giving the same level of price, if there is a change in the income and change in the income is increase in the income, that leads to increase in the quantity demanded, because income and quantity demanded they are positively related. The demand curve shift from D to D 1 and in this case there is a shift in the demand, there is no movement along in the demand curve. Similarly, if you look at for the other variables also, whenever there is a change in the price of related goods or whenever there is a change in the taste and preference of the consumer or any other factor which is non-price, the shift in the demand curve is goes to right. If it is a case of increase in the quantity demanded and it comes to left, if there is a decrease in the demand curve. So, if you will say generally if this is a demand curve, here we take quantity, here we take price. If there is a increase in the quantity demanded, the demand always shift to the right. If there is a decrease in the quantity demanded, the demand always shift to the left. So, this is the case of increase, demand curve shift to the right and this is the case of decrease when the demand curve shift to the left. So, now, we will take a specific example that in which case there is a change in the demand or in which case there is a change due to change in price and in which case there is that change in the demand is because of non-price determinant. So, if you have seen the graph, initially demand curve is D 0. Whenever there is a decrease in the demand it shift to the left and it becomes D 2 the demand curve is D 2. Whenever there is an increase in the demand, the demand curve shift to right and that is D 1. So, in case of increase in demand curve, it shift to the right and in case of decrease in demand curve, it shift to the left. Now, suppose we take a case of specific case, if there is a policy initiative how this change in the demand. A policy to discourage smoking shift the demand curve to the left. So, this is the case of the product is cigarette here. The price of cigarette pack is represented on the y axis and number of cigarettes smoke per day is represented on the x axis. The demand curve is D 1. When the price is 2, the quantity demanded is 20. Now, if you remember there is a ban on the public smoking before 1 year, the policy or the rule by the government is that there is ban in the public smoking. There is no change in the price. If the same price the quantity demanded has decreased from 20 to 10 now. Now, what is the reason here? What the reason here is that there is a change in the demand not due to change in the price rather due to change in the non price determinants. So, in this case because of government policy there is a ban on the public smoking which discourages the smoking and reduce the demand. Price even fixed at 2. Now, the quantity demanded moves from 20 units to 10 units and the demand curve shift to the left and the new demand curve is D 2. So, the price is fixed. The change in the demand is because of non price determinant, the demand curve moves from D 1 to D 2. So, a policy to discourage smoking shift the demand curve to the left price remain fixed. Now, suppose we take a different case that there is a imposition of the tax by the government. Now, what is the tax? The tax that raises the price of cigarettes resolved in a movement along the demand curve. Whenever there is a imposition of tax, the producer try to shift that to the consumer and how they shift this to the consumer through the increase in the price. So, in this typical graph if you look at the price is again represented on the y axis and the quantity the number of cigarettes smoke per day that is represented on the x axis. The demand curve is D 1. When the price is 2 the quantity demanded is 20 corresponding to point A and when there is a tax imposition of tax that leads to increase in the price from 2 rupees to 4 rupees following the law of demand there is a decrease in the quantity demanded from 20 unit to 12 unit. And in this case if you look at the change in the quantity demanded is solely due to change in the price because price increases from 2 to 4 that is the only reason that quantity demanded is shifting from 20 unit to 12 unit. So, this case the change in the demand is represented through only in the movement and the demand curve from one point to another point basically representing two combination two price and quantity combination one combination. When price is 2 rupees quantity demanded is 20 unit and in the second combination when price is 4 rupees the quantity demanded is 12 unit. So, two points to remember here point 1 when the change in the demand is due to change in the price the shift is between one point to another point in the demand curve. So, the change is represent through the movement along the demand curve from one point to another point. And second point is when the change in the demand is due to change in the non-priced determinants of demand like any other factor a part of price the movement or the change in the demand is represented through the shift in the demand curve. If there is a increase in the demand curve that leads increase in the demand that leads to the shift in the demand curve to the right and if there is a decrease in the demand that shift to the demand curve to the left. Now, we will come to the second market force that is supply forces. So, if you remember in the beginning of the session that that market forces is always governed by the demand and supply forces and they generally set the rule for the market mechanism or the market mechanism works on the basis of supply and demand principle. We will discuss the second forces of market that is supply and to define supply we can say that this refers to various quantities of the good which the seller is willing and able to sell at different prices in a given market at a particular point of time. So, time being fixed prices are different and at different prices what is the exact quantity the producer is willing and able to sell that is supplier. So, if you look at again it goes to the basic principle of demand that it is not only the supply is dependent only also the producers willing to sell and able to sell. So, when it comes to willing to sell the whatever the price that is give some profit to the producer and when it comes ability to sell whether the producer has the ability to sell or ability to produce the product or not. If the producer has the ability to produce the product generally they sell it in the market if they are getting a good price that leads to the willingness to sell in the market. So, supply it refers to various quantity of goods and services which a seller is willing and able to sell at the different prices in different market or may be in a given market at a particular point of time. Now, what is law of supply as you remember that price and quantity demanded is always inversely related other things remaining constant. So, following the Sattery Paribas principle Sattery Paribas means everything is everything every other things is equal the law of supply state that the quantity supply of a good increases when the price of good increases. So, in this case if you look at the economic law for supply relationship between the supply and price is there is a positive relationship between the price and the quantity supply more is the price more is the quantity supply. But in case of demand if you remember there is a inverse relationship between the price and quantity demanded more is the price less is the quantity demanded and less is the price more is the quantity demanded. In case of supply more is the price more is the quantity supply less is the price less is the quantity supply. And the logic is also quite clear that if the price is more the seller will sell more in the market because they will get more profit if price is low they will prefer to sell low because they are not getting more profit price is low. So, if you take a typical example when the price of good decreases from 25 rupees to 10 rupees the quantity supply decreases from 31 rupees to 16 rupees. So, when price was 25 the quantity supply is 31 and when price is 10 the quantity supply is 16 which goes according to the basic principle of law of supply that when price is more quantity supply is more and when the price is less quantity supply is less that gives us in term of the number also price is 25 quantity supply is 31 price is 10 and quantity supply is 16. Now, we will discuss what are the factor that influence the supply the first factor which influence the quantity supply is price of the goods and services. So, just in the previous slide we are talking about that how the price and quantity supply they are related to each other if price is more quantity supply is more price is less quantity supply is less. So, they are positively related price and quantity murdered they are positively related. So, the first factor influence the supply is price because the seller or the producer they always look for profit when they are producing in the market and selling in the market. So, if price is more they are going to sell more. So, the first factor which influence the price influence the quantity supply is the price of goods and services. The second factor which influence the supply is input prices like how input prices is influencing the supply input price is 1 this is the input for the output. So, whether the input is land whether the input is labour whether the whether the input is capital whether the input is technology whether the input is entrepreneurship the more is the price of those inputs it is more costly for the producer to produce. And if price remain fixed input price is more the difference between the cost of production and market price comes down and that leads to less profit to the producer. So, in this context if the input price is increasing the supply is less because if you are keeping all other thing constant in the producer is not able to increase the price with the increase in the input prices they will prefer to supply less because they are not getting a good amount of profit if input price is on a higher set and the market price is remain constant. So, input price is increasing generally the quantity supply decreases and if input prices is decreasing the quantity supply is more because the because the gap between the input price and the market price is more and they get more profit. So, input price and quantity supply they are inversely related. Then the third factor is price of goods related in the production. Now, what is the price of goods that is substitute and the complementary good? If substitute good is supplied more then the this typical good has to supply less. So, there is inverse relationship between the substitute good and this good price of substitute good and this and there is a positive relationship between the price of complementary goods and the price of between the quantity supply of this typical good. Similarly, technological advances if the good technological advances if technology is good there is a progress that leads to more supply in the market. If expected future price of the product it works if there is a increase in the expected future price of the product is going to increase the supply less and if the expected future price is going to decrease the supply more. So, again the relationship between the quantity supply and the expected future price of the product is inverse and number of firms producing the product more the number of producer in the market more the number of seller in the market the quantity supply is more. Then we will come to a supply function and supply function at this point if you are keeping all other variables which influence the quantity supply remain fixed only if it is a relationship between the price and quantity supply which comes directly between the law of supply all other things remaining constant. Law of supply says that there is a positive relationship between the price and quantity supply. Following that if you formulate a supply function which shows a relationship between price and quantity supply quantity supply is a function of p. So, if you are taking a supply function where q s is equal to 10 p x if value of p x takes 2 then q s is 20 if the value of p x is equal to 5 q s take 50. So, if you look at in the supply function also the price quantity supply is dependent on the price and it is positive there is because there is a positive sign there is no negative sign over here. So, they are positively related and q s is equal to 10 p x means always if the whatever the price of quantity supply is multiplied by that number. Now, if you consider the generalized supply function which includes all the variables which influence the supply. So, if what are the variable that influence the supply the first one is price of the product that is represented through k p h is the value of intercept p is the price of product p i is the input price p r is the price of related goods in the production whether it is a substitute good or whether the complementary goods t is the technological advances p is the expected future price of the product and f is the number of producer in the market. So, there is one variable attached with each variable in terms of parameter. So, k is associated with p l is associated with p 1 m is associated with r n is associated with t small r is associated with p e and s is associated with f. So, all these variables like k l m n r and s they are the slope parameters and what is the role of slope parameters in case of a generalized supply function it measures the effect on quantity supply of changing one of the variable while holding the other constant. So, suppose what is the role of k or how k is being used k will measure the effect of quantity supply of changing when there is a change in the price. Similarly, what is the role of l l will measure the effect on quantity supply when there is a change in the input price m will measure the effect on quantity supply when there is a change in the price of related goods. Similarly, n will measure the change in the quantity supply when there is a change in the technological advances r will measure the effect on quantity supply when there is a change in the expected future price of the product and s will measure the effect on quantity supply when there is a change in the number of producers in the market. And how we represent the signup parameters? The signup parameter shows how variable is related to quantity supply. Positive sign indicates there is a direct relationship between that variable and quantity supply. And negative sign indicates there is an inverse relationship between that typical variable and the quantity supply. Now, we see that how both the variables, all the variables, all the factors, those influence the supply, how they are related with supply. The first variable is P, price of the product directly related to quantity supply. And the value of the slope parameter del Q s by del P is positive. Input price is inverse related with the quantity supply. The value of slope parameter is del Q s by del P a is negative because there is an inverse relationship between the input price and the quantity supply. The related price of the goods, other goods in the market, the relationship is inverse for the substitute and direct for the complement. How this is inverse for the substitutes? So, this is substitute goods. So, when the price of related goods increases, that leads to quantity of the related goods to decrease. Because their inverse related price and quantity supply, sorry the price and quantity demanded their inverse related. But how they are related with the quantity supply? Quantity supply is positive. So, whenever the price of related goods increases, quantity demanded decreases but quantity supply increases as price and quantity they are positively related. Now, how this will affect this quantity supply of this typical good? Since the substitute good is supplying more, in this case price there is no increase in the price, there is only increase in the price of related goods, the quantity supply of this will decrease. How this work for complementary goods? What is the nature of complementary goods? Complementary goods each one good, if two goods are complementary, one good cannot be consumed with other goods. So, in this case if the price of related goods increases, that leads to quantity demanded of quantity supply of the related goods increases and that also leads to increase in the quantity supply. Because if there is a demand for this, there is a supply of this, again there is a supply for this quantity supply. So, again it is the same logic for the quantity demanded also that complementary goods it cannot be consumed individually, if one cannot be consumed without another. So, in case of relationship between the quantity supply and the price of substitute good and the price of complementary goods, it always inverse for the substitute, the price of related good and the relationship to the quantity supply. And if it is a case of complement, it is always direct, because more is the quantity supply of the complementary good, more is also quantity supply for the this typical good, for what we are discussing the factors. In the first case, this is negative, the slope parameter is negative, in the second case the slope parameter is positive. Now, technological advances, the relationship is direct to the quantity supply, more is technological advances, more is the quantity supply, expected future price of the product. If the expected future price of the product is going to increase, quantity supply will decrease. Now, because the producer or the seller they will feel more, they will get more profit if they are going to postpone their sale in the market. And if it is going to decrease, they will prepone all their sale and they will sell more now. So, the relationship between the quantity supply and the expected future price of the product is inverse and the slope parameter R that is del Q s by del P that is negative. Coming to the last factor that influence the supply function, that is the number of producer or the number of sellers in the market. And how they are related to the quantity supply, they are directly related to the quantity supply, because if there are more producer, more seller, generally the market supply is more and also the individual firm as a summation of the individual firm, the market supply is more and they are directly related to the quantity supply. Here the slope parameter S that is del Q s by del F is positive. So, this is how all the factors that are related to quantity supply, some of them are directly related and some of them are inversely related with the quantity supply. Now, we will see what is a supply schedule. Supply schedule is a table that shows the relationship between the price of the goods and the quantity supply. So, this is nothing but when you take the exact quantity, exact number of a price and quantity supply in different time period or if it is a trend, if you are giving a trend that how the price and quantity supply they are related that shows through a supply schedule. So, if you take this specific example of the supply schedule, when the price is 0, this is the case of the product is ice cream cone over here. So, the price of ice cream cone is represented in the first column and the quantity of cone supplied is represented in the second column. If you look at when the price is 0, the quantity of cone supplied is 0, the simple logic over here is that if there is no price for the product, producer is not going to produce the product and they are not going to supply also. When the price is 0.50, still the quantity supply is 0, maybe we can explain this in this way that if this is 0.50, the producer is not getting their share of profit or it is not profitable for them to supply in the market and that is the reason they are not supplying it. So, one is 0, another is 0.5. So, one understanding from here is that when they are not getting profit by supplying in the market, they will not supply in the market. In the third case, when the price of ice cream cone is 1 rupees, the quantity supply is 1 unit and similarly when the price goes on increases from 1 to 1.5, 1.5 to 2, 2 to 2.5, 2.5 to 3 and look at the second column, the quantity of cone supply unit generally goes on increasing that is 1 to 2, 2 to 3, 3 to 4 unit and 4 to 5 unit. Now, looking at the basis as the law of supply that the price and quantity supply is positively related, in this case also you can get an evidence of that. If there is a increase in the price, that leads to increase in the quantity supply in the market and that is become evident when we are discussing about the supply schedule. So, this is the case of the individual supplier schedule. Now, if you say how you find the market supply schedule, when the number of firms are more in the market. Suppose, there are two producers, they are producing the ice cream cone and they are supplying it in the market, assuming that producer and seller they are the same entity. So, in the first column there is a price, in the second column the quantity supplied by seller A, third column quantity supplied by seller B and if you are assuming that in a market there are only two supplier, summation of the quantity supply of both the supplier A and B that will give us the total market supply. So, if you look at when the price is 0 or price is 0.5, the market supply or the total market supply is 0 because none of the supplier is supplying the ice cream cone when the price is 0. Similarly, when the price increases from 0 to 0.5 to 1 to 3, if you look at both the cases supplier A and B, there is a increase in the quantity supply and if you take a summation of supplier A and supplier B, assuming there are only two supplier in the market, the market supply is represented in the last column and that is the total market supply of ice cream cone at different price level in a given period. So, given period can be a month, given period can be a week, given period can be a year. So, generally market supply is the total quantity supplied by different seller in the market at different prices in a given period represented through the market supply. Now, we will see how we graphically we can explain the relationship between the price and the quantity supply. That through a supply curve and supply curve is a graph of the relationship between the price of goods and quantity supply. So, mathematically we do this through a supply function, what is the exact quantity at the different price and the quantity demanded and graphically we will see how the supply curve will look like, assuming that the law of supply is valid that there are positive relationship between the price and quantity supply. So, if you look at if you are taking directly the data from the supply schedule, y axis gives us the price of ice cream cone and x axis gives us the quantity of ice cream cone. So, in the price you start from 0, then it is 0 from 0.5, 1, 1.5, 2, 2.5, 3, price is increasing and with the increase in the price the quantity supply is also increasing. So, if the price is 0 quantity is 0, if the price is 0.5 again quantity is 0.5 and similarly when price is 1 each point, each bullet point on the curve that shows a price and quantity supply combination. So, since there are positively related with each other price and quantity supply, the supply curve is always upward sloping, because there is a positive relationship between the price and quantity supply. More is the price, more is the quantity supply, less is the price, less is the quantity supply. So, as contrast to the demand curve which is always downward sloping because the basis is inverse relationship between the price and quantity demanded, in case of supply there is always a positive relationship between price and quantity supply and that is the reason the supply curve is always upward sloping it has got a positive slope. So, now we will see what are the the factor that decides the quantity supply. As we have already discussed price, input price, technology, expectation and number of sellers. These are the factors or these are the determinants of the quantity supply. So, we know that supply curve is upward sloping it has a positive slope, but when there is a change in any of this factor which determines the quantity supply, whether it is price, whether it is input price, whether technology, whether it is expectation of the future price, number of sellers or may be the price of the related goods in the market, whenever there is a change in the those one of those variable, how there is a change in the supply. So, the logic is again uniform like in case of demand curve, if there is a change in the price, the change in the quantity supply is just from one point to another point, but if the change is because of non-price determinant if there is a change in the input price, there is a change in the technology or change in the any other non-price determinant, the supply curve will shift to the right or to shift to the left. If it is shift to the right in case of increase, it shift to the left in case of decrease. So, this is the shift in the supply curve, initially the supply curve is S 0, supply increases. So, supply curve moves to S 1, supply decreases and supply curve moves to S 2. So, shift in the supply due to non-price determinant not due to change in the price, rather due to change in the other factor which influence the supply. If because of that quantity supply is increasing, the supply curve will shift from S 0 to S 1 to the right. Because of those variable, if supply is decreasing, supply will move to left, the shift in the supply is to the left and that is from S 0 to S 2. Now, what will happen if there is a change in the price. So, if you look at, this is our supply curve. Here we take the price, here we take the quantity supply. So, in the previous slides as we have seen that if there is a increase in the supply, then supply curve will shift to the right. If there is a decrease in the supply, supply curve will shift to the left. So, this is the case of increase in the supply, this is the case of decrease in the supply. Now, what will happen exactly if there is a change in the price. These two scenarios exist when there is a change in the supply due to non-price determinant of the supply. Now, there is a change in the price, suppose this is the original supply curve and we get different points like this is suppose P 2, Q 2, Q 3, P 3, Q 4, P 4. So, price is P 2 quantity demanded if Q 2, if price increases from P 2 to P 3 quantity demanded moves from Q 2 to Q 3. If price increases from P 3 to P 4, again there is a increase in the quantity demanded from Q 3 to Q 4. So, if you look at, this is one price quantity supply combination, this is second price quantity supply condition and this is third price quantity supply condition. Now, what will happen when there is a change in the price. So, this is price and quantity supply combination. If there is a change in the price, if the price is increasing from P 3 to P 4, the movement is only between the supply curve between two different point of the supply curve that is from point A to point C. And if there is a decrease in the price again, suppose from P 4 to P 3, the movement is again along the supply curve from the point B to C. So, two points to remember again in case of supply also, if the quantity supply is increasing due to change in the price of price or quantity supply is decreasing due to change in the price, the movement is along the supply curve. And if the quantity supply is increasing due to non-price determinants, then there is a shift of the supply curve to the right. And if the quantity supply is decreasing due to non-price determinants, the shift is to the left of the supply curve. So, we have discussed about the demand, we have discussed about the supply. These are the two market forces generally that governs the market mechanism or that may be the principle of market demand forces and supply forces leads to the may be the working of the market system. Now, we will see how they reach to the equilibrium or how the market reaches to the equilibrium, assuming demand behaves in the similar manner how we have discussed and supply behaves in the similar manner how we have discussed just couple of minutes back. Now, what is market equilibrium before analyzing that how the demand forces behaves or how the supply forces behave, what is market equilibrium? Equilibrium refers to a situation in which price is reached the level where quantity supplied also equals to quantity demanded. So, if you look at if you plot now both the market demand and market supply in the graph, let us consider this is quantity supply, quantity supply quantity may be demanded or we can say this is quantity, this is price. Demand curve is downward sloping, supply curve is upward sloping, demand curve is downward sloping because there is a inverse relationship between the price and quantity demanded and supply curve is upward sloping because there is a positive relationship between the price and quantity supply. Now, the point at which demand curve intersects the supply curve, this is the point of equilibrium and this is the equilibrium price and this is the equilibrium quantity or sometimes we use the word interchangeably market clearing price and market clearing quantity. Now, so what is equilibrium? Equilibrium is a situation where the price has reached that level where the quantity supply is just equal to the quantity demanded. So, the equilibrium price is 1 or the price is 1 where at that price whatever the supplier wish to or would like to supply in the market that is the exactly equal to the whatever the consumers demand from the market for that typical product and corresponding to that that typical quantity is known as the equilibrium quantity and that typical price is known as the equilibrium price. So, equilibrium is a situation where equilibrium price the price reached to such a level where the quantity supply by the supplier is just equal to the quantity demanded by the consumer. So, market equilibrium is generally leads to equilibrium price and equilibrium quantity and it is determined by the intersection of demand and supply curve and at the point of intersection as we seen in the graph the quantity demanded is just equal to the quantity supply. At this point consumer can purchase all they want and producer can sell all they want at a market clearing price. So, the equilibrium price is also known as the market clearing price and at this price consumer can purchase all they want and producer can sell all they wish to sell in the market at the market clearing price. So, equilibrium point is 1 where the price level has reached such a level where the quantity supply is just equal to the quantity demanded. So, corresponding to the intersection point of the demand curve and supply curve we get the equilibrium point corresponding to that point the point on the x axis gives us the equilibrium quantity and point on the y axis that gives us the equilibrium price. At this price consumer can purchase whatever they want and producer can sell whatever they want in term of the quantity. Now, we will just extract whatever the demand schedule we discussed during discussing the discussion of demand and supply schedule when we discussed during the when we are trying to introduce the concept of supply. So, if you remember the first part gives us the demand schedule price and quantity they are negatively related they are inversely related to each other and second part gives us a supply schedule where price and quantity demanded they are positively related. So, if you look at carefully the schedule both the demand schedule and the supply schedule at rupees 2 the total market supply is equal to the total market demand. So, at the rupees 2 the total market demand is 7 units and at rupees 2 the total market supply is 7 unit. So, we can say rupees 2 is the equilibrium price or the market clearing price where the quantity demanded is equal to the quantity supply and 2 rupees as the equilibrium price and 7 unit as the equilibrium quantity. So, graphically this is the equilibrium of supply and demand as we discussed supply curve is upward sloping demand curve is downward sloping the point at which demand curve intersect the supply curve which become the equilibrium point corresponding to that we get the equilibrium price and in the y axis and we get the equilibrium quantity in the x axis. So, equilibrium quantity is 7 units and equilibrium price is 2 rupees specifically in this case. So, for the demand is equal to supply there is a market reaches the equilibrium. How long this can continue how long the demand can be equal to supply may be a situation arises where there is a surplus in the market because quantity supply is more than quantity demanded and sometimes it happens that there is a shortage in the market because quantity demanded is more than quantity supply. So, till the time demand is equal to supply there is equilibrium, but there is also deviation from the equilibrium at any point of time if quantity supply is more than quantity demanded or quantity demanded is more than quantity supply. We will take the first case where the quantity supply is more than quantity demanded and this situation is generally known as a surplus situation and how this happens when the price is greater than equilibrium price quantity supply is more than quantity demanded because the price is more than equilibrium price price and quantity supply they are positively related more is the price more is the quantity supply. So, at any point of time the price charge in the market is greater than equilibrium price than the quantity supply is greater than quantity demanded which leads to excess supply or a surplus in the market and how to come out again how to come out of the surplus situation and reaches the equilibrium producer try to lower the price to increase the sales and that leads to again the equilibrium. So, this is the case where if you look at the supply is more than demand and why supply is more than demand because the price is more than equilibrium price that leads to a situation of the surplus and how to come back the equilibrium again the supply will reduce the price and if the supplier is reducing the price as the basis of log demand whenever there is a decrease in the price that leads to increase in the quantity demanded. So, supplier will lower the price that will lead to lower in the quantity supply as contrast to that that will increase the quantity demanded because price is decreasing and that will lead that will lead to again to a situation where the quantity demanded is equal to quantity supply and market will reach to the equilibrium. The second situation is shortage when price is less than equilibrium price than the quantity demanded is greater than quantity supply. So, this is the second type of situation when the price goes below the equilibrium price and what the log demand says if there is a decrease in the price there is a increase in the quantity demanded. So, the same thing happens over here when the price is less than equilibrium price the consumer will demand more because price is on a lower side that leads to increase in the quantity demanded and quantity supply decreases because price is low and since price and quantity supply it is positively related the supplier will also reduce the supply. So, more is the quantity demanded less is the quantity supply and that leads to a increase in the quantity demanded and decrease in the quantity supply. So, price is greater price is less than equilibrium price quantity demanded is more than quantity supply. Now, what is the outcome? Outcome is there is excess demand or a shortage. Now, how to come out of this situation and how to reach equilibrium again supplier will increase the price. If there is a increase in the price that reduces the quantity demanded again the basis is law of demand. Increase in the price leads to decrease in the quantity demanded increase in the price on the other hand increases the quantity supply. So, that leads to again to a equilibrium because supplier is increasing the price that will increase the quantity supply and also that will decrease the quantity demanded. So, again the equilibrium will be reached when the quantity demanded is equal to quantity supply and here the here to come out of this shortage situation again there is a again there is a initiative by the supplier to increase the price. So, graphically this is the representation of the graphically this is the representation of the excess supply where the supply is more than demand and there is a surplus situation. How it happens? So, initially the equilibrium point is 7 units equilibrium price is 2 rupees. If price is 2.5 which is more than equilibrium price the supply increases from 7 units to 10 units and the demand decreases from 7 unit to 4 units. The gap between the 4 units and 10 units that is the surplus because the quantity supply is more than quantity demanded. Then the second situation excess demand the graphical representation of that price has decreased from the equilibrium price. So, equilibrium price is 2 price has decreased from 2 rupees to 1.5 less is the price more is the demand 1.5 is the price 10 rupees 10 units is the demand sorry 4 yes 10 units is the demand and what happens to supply? Supply decreases from 7 units to 4 units because less is the price less is the quantity supply. The gap between the 4 units quantity supply and 10 units quantity demanded that leads to shortage in the market. And again how to come back to the equilibrium again here the supply will increase the price which leads to increase in the quantity supply and leads to decrease in the quantity demanded and which will eventually lead to the equilibrium between the quantity supply and the quantity demand. Now, we will see what happens when there is a change in the demand and when there is a change in the supply. So, if you look at 7 is the equilibrium quantity 2 is the equilibrium price. Now, suppose demand increases why there is a increase in the demand? So, this is the case of your price of ice cream cone again hot weather increases the demand for ice cream demand increases from D 1 to D 2 and what is the what is the change in the quantity demanded the change in the quantity demanded is 7 units to 10 units. What happens to price since there is more demand the supplier will increase the price. So, price increases from 2 rupees to 2.5 and again quantity also increases from 7 units to 10 units. So, supply remain constant if there is a increase in the demand that leads to increase in the price and also increase in the quantity demanded. Then we will see that how there is a when there is a decrease in the supply how it affects the equilibrium. So, initially demand curve is given by demand supply curve is given by S 1 initial equilibrium is at 7 units. Suppose there is a technical failure and that reduces the supply of the ice cream leads to decrease in the supply decrease in the supply leads to a shift in the supply curve from S 1 to S 2 new equilibrium point the quantity is quantity is 4 the price is 2.5. So, a technical failure reduces the supply of ice cream which results in a higher price because supply is less demand remain constant price increases from 2 to 2.5 and quantity decreases from 7 units to 4 units. So, whenever there is a decrease in the supply that leads to increase in the price and increase in the decrease in the quantity demanded. Next we will see what is the shift in the both supply and demand in the next session because still now we are just looking at what happens when the supply remain constant demand increases or decreases and when demand remain constant when there is a decrease or increase in the supply what happens to the price equilibrium price and what happens to the equilibrium quantity. So, in the next session we will see when there is a simultaneous shift in the both supply and demand what happens to the equilibrium price what happens to the equilibrium quantity and the movement in the price and quantity demanded in which direction whether it increases whether it decreases.