Supply & Demand: Equilibrium Prices

AS Economics

Aims and Objectives

Aim: Understand equilibrium prices

Level

Objectives:
Define equilibrium Draw a market in equilibrium and disequilibrium

E-D C-B

B-A
A-A*

Analyse the factors influencing supply

Evaluate the case of shifts in supply and demand on equilibrium prices

Price Per Unit ($)

Qty Demanded Millions Barrels Per Day 50 52 54 56 58

Qty Supplied Millions Barrels Per Day 75 72 69 66 63

Starter
Plot the following supply and demand curves for oil.

20 19 18 17 16

15
14 13 12 11 10 9 8

60
62 64 66 68 70 72 74

60
57 54 51 48 45 42 39

The Market Equilibrium

Price S
Equilibrium:
The price at which supply equals demand, there is no tendency for change.

P1
Label the equilibrium price and qty on your oil diagram.

Q1

Qty

Equilibrium Price
Equilibrium means a state of equality between supply and demand. Known as market clearing price
At this price there is no excess demand or supply The quantity that producers wish to sell equals the quantity consumers wish to buy at that price

Without a shift in demand and/or supply there will be no change in market price.

Disequilibrium Price
A situation within the market where supply does not equal demand.

Excess Demand
Price

P1 P2

When market price is lower than the market equilibrium (P2), demand exceeds supply (a market shortage equal to Q3-Q2). There is therefore upward pressure on market price.

Q2

Q1

Q3

Qty

Excess Supply
Price

S P2
P1

When market price is higher than the market equilibrium, supply exceeds demand (a market surplus). There is therefore downward pressure on market price.

Q2

Q1

Q3

Qty

Price Per Unit ($) 20 19 18 17

Qty Demanded Millions Barrels Per Day 50 52 54 56

Qty Supplied Millions Barrels Per Day 75 72 69 66 Excess Supply

16
15 14 13 12 11 10 9 8

58
60 62 64 66 68 70 72 74

63
60 57 54 51 48 45 42 39 Excess Demand Market Equilibrium

Changes in Equilibrium
Task: Plot the demand and supply diagram again with the original quantities, as well as the new quantities demanded and supplied at each price level, using the table. What has happened to the market clearing price? Show this on your diagram. Draw the excess demand and excess supply lines on your diagram. What has happened to these?

Harry Potters Equilibrium

It is unusual to see people queuing outside bookstores these days, but Harry Potter fans have been doing just that as they await the release of the final book, Harry Potter and the Deathly Hallows. The publishers have decided to restrict the first print run of the book and the limited supply available has seen fans prepared to stand outside shops for several hours in order to secure a copy. Draw what may have happened to the S+D diagram.