Lesson IV Market Equilibrium - Basic Microeconomics

Markets

• The operation of the market depends on the interaction between buyers and sellers. 

Equilibrium

• the condition that exists when quantity supplied and quantity demanded are equal.

• there is no tendency for the market price to change.

Market Equilibrium

• only in equilibrium is quantity supplied equal to quantity demanded.

Market Disequilibria

• occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus.

Excess Demand / Shortage

• is the condition that exists when quantity demanded exceeds quantity supplied at the current price.

• When quantity demanded exceeds quantity supplied, the prices tends to rise until equilibrium is restored.

Excess Supply / Surplus

• is the condition that exists when quantity supplied exceeds quantity demanded at the current price.

• When quantity supplied exceeds quantity demanded, the price tends to fall until equilibrium is restored.

Higher Demand

• leads to higher equilibrium price and higher equilibrium quantity.

Higher Supply

• leads to lower equilibrium price and higher equilibrium quantity.

Lower Demand

• leads to lower prices and lower quantity exchanged.

Lower Supply

• leads to higher prices and lower quantity exchanged.

Relative Magnitudes of Change in Supply and Demand

• determine the outcome of market equilibrium.

Surplus

• Quantity demanded is less than quantity supplied

• Qd < Qs

Equilibrium

• Quantity demanded is equal to quantity supplied

• Qd = Qs

Shortage

• Quantity demanded is greater than quantity supplied

• Qd > Qs