How market equilibrium established?

At a price higher than equilibrium, demand will be less than 500, but supply
will be more than 500 and there will be an excess of supply in the short run.
Graphically, we say that demand contracts inwards along the curve and
supply extends outwards along the curve. Both of these changes are
called movements along the demand or supply curve in response to a price
change.

Demand contracts because at the higher price, the income

effectand substitution effect combine to discourage demand, and demand
extends at lower prices because the income and substitution effect combine to
encourage demand.
In terms of supply, higher prices encourage supply, given the supplier's
expectation of higher revenue and profits, and hence higher prices reduce the
opportunity cost of supplying more. Lower prices discourage supply because
of the increased opportunity cost of supplying more. The opportunity cost of
supply relates to the possible alternative of the factors of production. In the
case of a college canteen which supplies cola, other drinks or other products
become more or less attractive to supply whenever the price of cola changes.

Changes in demand and supply in response to changes in price are referred

to as the signalling and incentive effects of price changes.
If the market is working effectively, with information passing quickly between
buyer and seller (in this case, between students and a college canteen), the
market will quickly readjust, and the excess demand and supply will be
eliminated.
In the case of excess supply, sellers will be left holding excess stocks, and
price will adjust downwards and supply will be reduced. In the case of excess
demand, sellers will quickly run down their stocks, which will trigger a rise in
price and increased supply. The more efficiently the market works, the quicker
it will readjust to create a stable equilibrium price.
What is ceteris paribus?
Ceteris paribus, a Latin phrase, roughly means holding other things constant. The more
common English translation reads all other things being equal. This term is most widely
used in economics and finance as a shorthand indication of the effect of one economic
variable on another, keeping all other variables constant that could render an effect on the
second variable.
For an example, consider the laws of supply and demand. It could be said that if demand for
any given product is outweighed by the products supply, ceteris paribus, prices will likely
rise. The use of the Latin phrase in this example simply indicates if all additional factors that
could affect the outcome, such as the presence of a substitution, remain the same, prices
will generally increase.
What are the factors affect the demand of goods and services?

Price
Usually viewed as the most important factor that affects demand. Products have
different sensitivity to changes in price. For example, demand for necessities such as
bread, eggs and butter does not tend to change significantly when prices move up or
down
Income levels
When an individuals income goes up, their ability to purchase goods and services

increases, and this causes demand to increase. When incomes fall there will be a
decrease in the demand for most goods
Consumer tastes and preferences
Changing tastes and preferences can have a significant effect on demand for different
products. Persuasive advertising is designed to cause a change in tastes and
preferences and thereby create an increase in demand. A good example of this is the
recent surge in sales of smoothies!
Competition
Competitors are always looking to take a bigger share of the market, perhaps by cutting
their prices or by introducing a new or better version of a product
Fashions
When a product becomes unfashionable, demand can quickly fall away.

What are the factors affect the supply of goods and services?
Price:
Refers to the main factor that influences the supply of a product to a greater extent.
Unlike demand, there is a direct relationship between the price of a product and its
supply. If the price of a product increases, then the supply of the product also
increases and vice versa. Change in supply with respect to the change in price is
termed as the variation in supply of a product. Speculation about future price can
also affect the supply of a product. If the price of a product is about to rise in future,
the supply of the product would decrease in the present market because of the
profit expected by a seller in future. However, the fall in the price of a product in
future would increase the supply of product in the present market.
ii. Cost of Production:
1/3 Implies that the supply of a product would decrease with increase in the cost of
production and vice versa. The supply of a product and cost of production are
inversely related to each other. For example, a seller would supply less quantity of a
product in the market, when the cost of production exceeds the market price of the
product. In such a case the seller would wait for the rise in price in future. The cost
of production rises due to several factors, such as loss of fertility of land, high wage
rates of labor, and increase in the prices of raw material, transport cost, and tax
rate.
iii. Natural Conditions:

Implies that climatic conditions directly affect the supply of certain products. For
example, the supply of agricultural products increases when monsoon comes on
time. However, the supply of these products decreases at the time of drought. Some
of the crops are climate specific and their growth purely depends on climatic
conditions. For example Kharif crops are well grown at the time of summer, while
Rabi crops are produce well in winter season.
iv. Technology:
Refers to one of the important determinant of supply. A better and advanced
technology increases the production of a product, which results in the increase in
the supply of the product. For example, the production of fertilizers and good quality
seeds increases the production of crops. This further increase the supply of food
grains in the market.
v. Transport Conditions:
Refer to the fact that better transport facilities increase the supply of products.
Transport is always a constraint to the supply of products, as the products are not
available on time due to poor transport facilities. Therefore even if the price of a
product increases, the supply would not increase.