Understanding Market Equilibrium and the Invisible Hand

Market Equilibrium

Market Equilibrium is where Quantity demanded (Qd) and Quantity Supplied (Qs) are equal.

Equilibrium Price

The price at a market equilibrium is called Equilibrium Price (P*).

Equilibrium Quantity

The quantity at a market equilibrium is called Equilibrium Quantity (Q*).

The Invisible Hand

The Invisible Hand is a term used by Adam Smith to describe the natural force that guides free market.

Shortage

A shortage is when quantity demanded in an economy is greater than quantity supplied.

Shortage Amount

The shortage amount is Qd - Qs.

Price Ceiling

A price ceiling is the legal maximum price which a good can be sold.

Surplus

A surplus is a situation in which quantity supplied exceeds the quantity demanded.

Surplus Amount

The surplus amount is Qs - Qd.

Price Floor

A price floor is the legal minimum price which a good can be sold.

Demand Shift

A demand shift occurs when there is a change in consumer preferences, income, or the price of related goods.

Supply Shift

A supply shift occurs when there is a change in production costs, technology, or the number of sellers.

Demand Decrease Effect

When demand decreases from D1 to D2, P decreases from P1 to P2 & Q decreases from Q1 to Q2.

Demand Increase Effect

When demand increases from D2 to D1, P increases from P2 to P1 & Q increases from Q2 to Q1.

Supply Decrease Effect

When supply decreases from S1 to S2, P increases from P1 to P3 & Q decreases from Q1 to Q3.

Supply Increase Effect

When supply increases from S2 to S1, P decreases from P3 to P1 & Q increases from Q3 to Q1.

Simultaneous Demand and Supply Shift

Demand and supply can shift by the same amount or different amounts and in the same direction or in different directions.

Decrease in Demand and Supply Effect

A decrease in demand and supply results in equilibrium price remaining the same, but equilibrium quantity being lower.

Increase in Demand and Supply Effect

An increase in demand and supply can result in equilibrium price being lower and equilibrium quantity being higher.

Decrease in Demand and Increase in Supply Effect

A decrease in demand and an increase in supply results in equilibrium price being lower and equilibrium quantity remaining the same.

Increase in Demand and Decrease in Supply Effect

An increase in demand and a decrease in supply results in equilibrium price being higher and equilibrium quantity being lower.