Unit 4 - Demand and Supply, Equilibrium and Application

What is equilibrium, equilibrium price and quantity?

Def: “Equilibrium is a situation in which the market price has reached the level at which quantity supplied equals quantity demanded” 

• When market and demand curves are put together there is a point where they intersect, that point is called the equilibrium point. 

• The word equilibrium means, that in a situation all forces are balanced thus: At equilibrium price, the quantity that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. This is sometimes called market clearing price because everyone in the market has been satisfied

Def: “Equilibrium price is the price that balances quantity supplied and the quantity demanded” 

• The price at this intersection is called the equilibrium price and the quantity is called equilibrium quantity 

Def: “Equilibrium quantity is the quantity supplied, and the quantity demanded at the at the equilibrium price” 

What is surplus?

Def: “Surplus is a situation in which the quantity supplied is greater than the quantity demanded” 

• Surplus is sometimes referred to as excess supply. A response to surplus suppliers will cut their prices, with prices falling there will be an increase in the quantity demanded and decrease quantity supplied. 

• These changes move along the supply and demand curve, it doesn’t move/shift the curves 

What is shortage?

• Def: “Shortage is a situation in which quantity demanded is greater than the quantity supplied” 

• When market price is below the equilibrium point the quantity of good demanded exceeds that of the quantity supplied, meaning there is a shortage. This is when demanders are unable to buy all that they want at the going price. This is sometimes called excess demand 

• With too many buyers and too little supplies, a seller can increase their prices without losing sales, by doing this the demand falls and quantity supplied increases. 

• These changes move along the curves  

What does the law of supply and demand state?

Def: “The law of supply and demand is the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for the good to balance” 

What are the three steps to analyzing changes in equilibrium?

• Equilibrium price and quantity depends on the position of the demand and supply and demand curve. If there is an event that shifts one of the curves, a new equilibrium price and exchange is formed 

• The effects that some events have on the equilibrium market is analyzed in 3 steps 

• Decide whether the event shifts the supply curve, demand curve, or both. 

• Decide whether the curve shifts to the right or left 

• Use the demand and supply diagram to compare initial and new equilibrium