Demand and supply

Equilibrium

Supply and demand together

Put supply and demand curves on the same graph Intersection gives the equilibrium price and quantity

Price

PE

QE

Quantity

PE and QE represent the equilibrium price and quantity

What is Equilibrium Price?

The price that equates the quantity demanded and the quantity supplied

1999 South-Western College Publishing

Equilibrium

Equilibrium Price - the price at which

the quantity demanded is equal to the quantity supplied. Other things being unchanged, there is no tendency for this price to change.

Equilibrium

A market is in equilibrium when the quantity demanded is equal to quantity supplied at the market price.

At the equilibrium market price there are exactly the same number of goods that suppliers are willing to sell as consumers are willing to buy.

Equilibrium

When a market is in equilibrium there is no tendency for price or quantity to change.

Economists often refer to equilibrium as the "market clearing price" where all willing sellers find all willing buyers.

Market Equilibrium (Verbal)

The equilibrium price and quantity in a market occur at the price where the quantity demanded equals the quantity supplied. Example: for the demand and supply curves used, the equilibrium price is 17, where the quantity demanded, 23, equals the quantity supplied, 23.

Market Equilibrium (Table)

At a price of 17, the quantity demanded is equal to the quantity supplied, as the table below illustrates.

Market Equilibrium (Graph)

The market equilibrium occurs at the intersection of the supply and demand curves. At price = 17, the quantity supplied = quantity demanded = 23.

Market Equilibrium (Equations)

The equilibrium price and quantity satisfy both the demand and supply equations simultaneously.

 REVIEW

Product Demand, Supply and Market Prices

The market "clears" at the point where all the supply and demand at a given price balance. That is, the amount of a commodity available at a given price equals the amount that buyers are willing to purchase at that price.

Product Demand, Supply and Market Prices

S
D

It is assumed that there is a process that will result in the market reaching this point, but exactly what the process is in a real situation is an ongoing subject of research. Markets which do not clear will react in some way, either by a change in price, or in the amount produced, or in the amount demanded.

Product Demand, Supply and Market Prices

Graphically the situation can be represented by two curves: one showing the price-quantity combinations buyers will pay for, or the demand curve; and one showing the combinations sellers will sell for, or the supply curve.

Product Demand, Supply and Market Prices

The market clears where the two are in equilibrium, that is, where the curves intersect. In a general equilibrium model, all markets in all goods clear simultaneously and the "price" can be described entirely in terms of tradeoffs with other goods.

Disequilibrium

Non-equilibrium prices can occur in free markets because of imperfect information and uncertainty, but it usually doesn't last for long.

What happens if price is below equilibrium?

A shortage, or excess demand, arises

At P2, QD > QS, thus a shortage or excess demand exists

S
P2
QS

Shortage
QD

D
19

How is the shortage eliminated?

The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied.

Disequilibrium

When demand exceeds supply, the market price will rise If, at the current price, consumers are unable to buy as much as they would like to buy, they may offer higher prices in an effort to get more of the available supply for themselves.

What happens if price is above equilibrium?

A surplus, or excess supply, arises

At P1, QD < QS, thus a surplus or excess supply exists

P1

Surplus

S
D

QD

QS
23

How is the surplus eliminated?

The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded.

Disequilibrium

If there is excess supply, it means that producers cannot sell all that they wish to sell at the current price. When supply exceeds demand, the market price will fall

Disequilibrium

If there is excess supply, they may then begin to offer to sell at lower prices, for example through clearance sales or discounts.

Disequilibrium

If purchasers observe the glut of unsold output they may begin to offer lower prices.

For either (previous slide) or both of these reasons, the price in the market will fall.

Disequilibrium

This law of price adjustment makes considerable sense and conforms with common experiences of how markets workshortages of any product tend to lead to price rises while gluts tend to lead to price falls.
Most importantly, it implies that prices will move towards the level at which demand and supply will be equal.

Disequilibrium

The combination of a negatively sloped demand curve and a positively sloped supply curve with the law of price adjustment will guarantee a stable market, so long as any market in this product exists (that is, provided the demand and supply curves intersect at some positive price and quantity).

The equilibrium price

The term equilibrium means a state of balance; it occurs when desired purchases equal desired sales and there are no forces tending to make anything change.

The equilibrium price

When quantity demanded equals quantity supplied, we say that the market is in equilibrium. The equilibrium price corresponds to the intersection of the demand and supply curves.

The equilibrium price

At prices above equilibrium there is excess supply and downward pressure on price.

The equilibrium price

At prices below equilibrium there is excess demand and upward pressure on price.

Summary, shortages, surpluses, and equilibrium

P1 P3 P2

Surplus
Shortage

S
D
34

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Q3

Conclusion

Whatever the market in which we are interested, the analysis of how demand and supply interact to determine the market-clearing price is an essential tool. It is applicable to all situations in which some maker or owner of a product wishes to exchange the product with a potential user.

How shifts in S and D affect equilibrium price and quantity

Right Shift in Demand

P2 P1

S
D2 D1
Q1

Q2

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Summary, demand changes

Increased demand, price and quantity both rise

Left Shift in Demand P1 P2

S1 D2
Q2

D1
39

Q1

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Summary, demand changes

Decreased demand, price and quantity both fall

Right Shift in Supply

S1
P1 P2

S2

D
Q1 Q2
4 1
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Summary, supply changes

Increased supply, price falls, quantity rises

Left Shift in Supply

S2
P2 P1

S1

D
Q2 Q1
4 3
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Summary, supply changes

Decreased supply, price rises, quantity falls

If both curves shift, you can predict price or quantity, but not both unless the magnitude of the shifts are known

Examples: shifts in both S and D curves

Say both S and D increase, what can we say about equilibrium P and Q?

ANSWER

Q will increase, but P is indeterminate

Examples: shifts in both S and D curves

Say S increases but D decreases, what can we say about equilibrium P and Q?

ANSWER:

P will decrease, but Q is indeterminate

Supply and demand problems

Suppose apples and oranges are substitutes to consumers: Bad weather destroys many apple orchards-what happens to equilibrium price and quantity in the apple market? In the Orange market?? Illustrate graphically.

S1 P P

S
P2 P2

P1
D

P1 D

D1

Q2

Q1

Q1

Q2

Apple market, supply decreases, price rises, quantity falls

Orange market, demand increases, price and quantity rise

Oprah Winfrey says on tv that she will never eat another hamburger. What might happen to the equilibrium price and quantity in the beef market? Show graphically with supply and demand curves.

Decrease in demand in the beef

market, price and quantity fall

P1 P2

S1 D2
Q2

D1
53

Q1

The demand for computers has clearly increased over time, due to higher incomes and changing preferences towards computers.
Despite the increased demand, the price of computers has continued to fall. Show graphically with supply and demand curves how this could happen, and give some possible explanations.

S
P2 P1 P3 D S1

D1

If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more firms

An increase in the wages paid to fishermen will have what effect on the fish market equilibrium?

a. Price will decrease, and quantity will decrease. b. Price will increase, and quantity will increase. c. Price will decrease, and quantity will increase. d. Price will increase, and quantity will decrease. e. Price and quantity will stay the same.

Over the past couple of years, prices for personal computers have fallen dramatically, but suppliers have offered more and more of them for sale. Does this refute the law of supply? Explain.

 THE

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