Question

What is the arbitrage equation?

Answer 1

Arbitrage equation is nothing but the idea
that the structure of asset returns leads naturally to a model of risk premia, for otherwise there would exist an opportunity for arbitrage profit.

Further it is about the arbitrage pricing theory, which is derived from an arbitrage argument, not a market equilibrium argument. The risk premia follow from the factor structure of the asset returns. Asset supply is irrelevant to the argument. If some set of asset returns has the factor structure, then the conclusion follows for this set.