1.6 Market Equilibrium and Changes in Equilibrium

Equilibrium

• When supply = demand, there is equilibrium in the market

• Equilibrium creates a single price and quantity for a good/service for that market

Requirements for a supply & demand graph

Label ACES

1. Axis

2. Curves

3. Equilibrium

4. Shifts

Changes in Equilibrium

When supply or demand changes, the equilibrium price & quantity change

Increase in Demand graph

D →
P increase
Q increase

Decrease in Demand graph

D ←
P decrease
Q decrease

Increase in Supply graph

S →
P decrease
Q increase

Decrease in Supply graph

S ←
P increase
Q decrease

Simultaneous Increase in Supply and Demand

P ? indeterminate
Q increase

Simultaneous Decrease in Supply and Demand

P ? indeterminate
Q decrease

Simultaneous Supply decrease & Demand increase

P increase
Q ? indeterminate

Simultaneous Supply increase & Demand decrease

P decrease
Q ? indeterminate

Market Disequilibrium

1. Surplus (Price Floor)

2. Shortage (Price Ceiling)

Surplus

Price is TOO high, so consumers’ demand is lower than supply

Shortage

Price is TOO low, so consumers’ demand is higher than supply

Price Floor

Minimum price for a good/service determined outside of the market (typically by govt.)

ex. minimum wage

raises the bar

Price Ceiling

Maximum price for a good/service or resource determined outside of the market

like a lid

Price Floor Graph

=SURPLUS
(Price, px, below Equilibrium price, pe)

Floor is at the top

ex. Minimum Wage - meant to increase standard of living but creates a labor surplus because companies can’t have as many employees

if price floor is effective, then q_d < q_s : surplus labor exists

Price Ceiling Graph

= SHORTAGE
(Price, px, below Equilibrium price, pe)

Ceiling is at the bottom

Ex. Rent control

if price is p_x, then q_s < q_d : shortage exists (shortage = q_d - q_s)