What is Market Equilibrium? Show the effect of an increase in Supply for Forestry Goods in Market Equilibrium.

Prices of commodities are determined by the interaction of two forces i.e demand and supply. 

 

Demand has an inverse relation with the price when the price rises, less quantity is demanded. On the other hand, supply has a direct relation to the price if price increase, more quantity is supplied and vice versa. 

 

It is the equality of these two forces which settles the price of a commodity at a particular level in the market. If at any time, the quantity demanded and quantity supplied are not equal, price starts moving. The movement of price induces opposite changes in demand and supply. A fall in price extends demand but contracts supply. While a rise in price contracts demand and expands supply. 

 

The movement of price, upward or downward, continues till such a price is reached at which demand becomes just equal to supply. This is called equilibrium price. Thus equilibrium of market refers to a situation where forces of demand and supply balance each other.

 

From the table, it shows that equilibrium price per m3 of Timber is determined at Rs.900 and the equilibrium quantity of timber is 60 m3.(Price is OP& quantity demand & supply is oq)

The effect of the increase in supply for forestry goods may change the market equilibrium. Given the demand curve if the increase in the supply of forestry goods, will tend to decrease the price in the market. When the price will decrease, the demand for forestry product will increase and the supply curve will shift rightward. DD &SS are original demand and supply curves. The equilibrium price and quantity are OP & OQ when supply increases the curve shift to S/ position and a new equilibrium will be E/. At this new equilibrium, the price will decrease to OP/ and quantity demand will increase to OQ/.

 

 

———-