ECON 101 - Week 9 - Market Equilibrium

Market equilibrium is the condition where the quantity demanded by consumers equals the quantity supplied by producers.
This results in a stable market price and quantity.
It's the point where the demand curve and the supply curve intersect.
Mathematically, it is the point where Qd = Qs.

Shortage: Occurs when the quantity demanded is greater than the quantity supplied at a given price.
- Too many buyers, not enough goods.
Surplus: Occurs when the quantity supplied is greater than the quantity demanded at a given price.
- Too much product, not enough buyers.

Example: Given demand function Qd = 80 - 4P and supply function Qs = -10 + 5P.
Equilibrium Condition: Set quantity demanded equal to quantity supplied: Qd = Qs.
Substitute the given functions: 80 - 4P = -10 + 5P.
Rearrange the equation to isolate P: 80 + 10 = 5P + 4P.
Simplify: 90 = 9P.
Solve for P: \frac{90}{9} = P.
Equilibrium price: P = 10.
Verification: Substitute P = 10 into both demand and supply functions.
- Q_d = 80 - 4(10) = 80 - 40 = 40.
- Q_s = -10 + 5(10) = -10 + 50 = 40.
Since Qd = Qs = 40, the equilibrium price is indeed Pe = 10 and the equilibrium quantity is Qe = 40 units.

A table can be used to find the market equilibrium by comparing the quantity demanded and quantity supplied at different prices.
Example:
- Price 0: Quantity Demanded (Qd) = 80, Quantity Supplied (Qs) = -10.
  - Qs - Qd = -10 - 80= -90, Market Condition: Shortage.
- Price 5: Quantity Demanded (Qd) = 60, Quantity Supplied (Qs) = 15.
  - Qs - Qd = 15 - 60= -45, Market Condition: Shortage.
- Price 10: Quantity Demanded (Qd) = 40, Quantity Supplied (Qs) = 40.
  - Qs - Qd = 40 - 40= 0, Market Condition: Equilibrium.
- Price 15: Quantity Demanded (Qd) = 20, Quantity Supplied (Qs) = 65.
  - Qs - Qd = 65 - 20= 45, Market Condition: Surplus.
- Price 20: Quantity Demanded (Qd) = 0, Quantity Supplied (Qs) = 90.
  - Qs -Qd = 90 - 0= 90, Market Condition: Surplus.
Key Insight:
- At price 10 and quantity 40, the market is in equilibrium.