Supply, demand and the equilibrium price – Example

Supply has been defined as the quantity that the sellers are willing and able to sell to the market. An example of quantity supplied is the oil refinery products extracted from crude oil. For the by products of the refinery to be categorized under supply then the refinery must have the ability to produce the products. The refinery must also quote the prices of these by products. The refinery should also be willing to supply the products in the market.

Demand is the quantity that consumers are willing and able to buy from the market at a certain quoted prices. An example of demand is in the purchase of refined oil products. The consumers must have the purchasing power to buy the commodity. The consumers should also be willing to purchase the product in the market. Then the by products must be priced.

An equilibrium point is described as the intersection between the supply and the demand curve. The equilibrium price is the point that will equate buyer’s willingness to purchase a specific product along the demand curve. At the equilibrium point there is no tendency to vary the amount supplied or vary the amount demanded. There is no shortage or excesses in this market. The behavior of both the buyers and the seller is try to make the best bargain in the market  and act in the most rational way. This will make the market to always adjust itself to equilibrium. If we suppose that a company that manufactures bolts produced about three million bolts. We also assume that to produce these bolts the company incurs a cost of $ 4 million. Therefore the company must receive revenue of amount $ 4 million to cater for all these costs. At this point the firm will be making zero profits. The company will have to add up a profit margin to make profit out of this venture. The buyers will also be willing to buy the bolts at a price slightly above $ 4 million but not according to the company margin of profit. If the sellers stick to their prices it means that less will be demanded and the bolts supply will accumulate in the store making the company to incur extra warehousing costs. If the company was to sell the bolts below the $ 4 million then the company will incur losses. Therefore the bolt company is not wiling to sell the bolt at these prices. The venture is not also economically viable if the company decide to sell at this price. The company will therefore sell the bolts at a price that gives a profit margin but which the buyers are willing and able to buy the bolts at from the market. Therefore an equilibrium point is reached where both the supplier and the buyers are willing and able to make the transaction.

If the bolts consumers were willing to pay for each additional bolt output but the supplier was not in the capacity to supply this product then there exists a shortage in the market. The shortage will not last long since more company will enter in this market to take advantage of the profit opportunity.

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yen April 26, 2016 at 4:14 am

1. An economy is based on two sectors agriculture and minerals. Production of a unit of agriculture requires an input of 0.4 units from agriculture and 0.2 units from minerals; production of 100 units of minerals requires an input of 20 units from agriculture and 10 units from minerals. Find the total output necessary to satisfy a final consumer demand of
a) 5 million units of agriculture and 10 thousand units of mineral.
b) 20 million units of agriculture and 5 thousand units of mineral.


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