Equilibrium in Markets

Equilibrium

Market Equilibrium

  • Equilibrium in a market happens when the price balances the plans of buyers and sellers.

  • The equilibrium price is the price at which the quantity demanded equals the quantity supplied.

  • The equilibrium quantity is the quantity bought and sold at the equilibrium price.

  • Prices adjust when plans of buyers and sellers do not match.

  • The market is a process with a tendency towards balance.

  • At equilibrium, the plans of buyers and the plans of sellers align.

  • The quantity demanded and the quantity supplied are equal at equilibrium.

Price, Quantity, Supply, and Demand Relationship

  • Equilibrium Example:

    • If price = $1.50, quantity demanded (40) equals quantity supplied (40).

    • There is neither a shortage nor a surplus; there is an equilibrium.

  • Surplus Example:

    • If price = $2, quantity supplied (50) exceeds quantity demanded (30).

    • There is a surplus.

    • The Quantity Supplied is 20 more than the Quantity Demanded.

  • Shortage Example:

    • If price = $1, quantity demanded (60) exceeds quantity supplied (20).

    • There is a shortage.

    • The Quantity Demanded is 40 more than the Quantity Supplied.

Price as the Adjustment Mechanism

  • At any price above equilibrium, surplus forces the price down.

  • At any price below equilibrium, shortage forces the price up.

  • Price is the adjustment mechanism.

  • At the equilibrium price, buyers’ plans and sellers’ plans agree, and the price doesn’t change until some event changes demand or supply.

Market Efficiency

  • Markets solve the problem of shortages in a socially beneficial way.

  • The supply that exists goes to the people with the highest valued uses based on the fact that they are willing to pay more.

Equilibrium Analysis Tool

  • If there is no change to supply or demand, there is no change to price or quantity.

  • A change in demand, a change in supply, or a change in both demand and supply, changes the equilibrium price and the equilibrium quantity.

Changes in Demand and Supply

  • Increase in Demand:

    • The demand curve shifts rightward.

    • At the original price, there is now a shortage (Quantity Demanded > Quantity Supplied).

    • The price rises, and the quantity supplied increases.

  • Decrease in Demand:

    • The demand curve shifts leftward.

    • At the original price, there is now a surplus (Quantity Supplied > Quantity Demanded).

    • The price falls, and the quantity demanded decreases.

  • Increase in Supply:

    • The supply curve shifts rightward.

    • At the original price, there is now a surplus (Quantity Supplied > Quantity Demanded).

    • The price falls, and the quantity demanded increases.

  • Decrease in Supply:

    • The supply curve shifts leftward.

    • At the original price, there is now a shortage (Quantity Demanded > Quantity Supplied).

    • The price rises, and the quantity supplied decreases.

Combined Changes in Demand and Supply

  • Increase in Both Demand and Supply:

    • The equilibrium quantity increases.

    • The change in equilibrium price is uncertain because the increase in demand raises the equilibrium price, and the increase in supply lowers it.

  • Decrease in Both Demand and Supply:

    • The equilibrium quantity decreases.

    • The change in equilibrium price is uncertain because the decrease in demand lowers the equilibrium price, and the decrease in supply raises it.

  • Decrease in Demand and Increase in Supply:

    • The equilibrium price decreases.

    • The change in equilibrium quantity is uncertain because the decrease in demand decreases the equilibrium quantity, and the increase in supply increases it.

  • Increase in Demand and Decrease in Supply:

    • The equilibrium price increases.

    • The change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity, and the decrease in supply decreases it.

Key Equilibrium Concepts

  • Equilibrium is a situation where Quantity Supplied and Quantity Demanded at a particular price are equal -- they are in Balance.

  • Equilibrium is a tendency, a set of forces that bring the quantity supplied and quantity demanded into balance.

  • Equilibrium Price: price when quantity supplied and Quantity demanded are equal.

  • Equilibrium Quantity: Quantity when quantity supplied and quantity demanded are equal at the equilibrium price.

  • If quantity demanded is greater than the quantity supplied, there is a shortage, and the price will go up until balance is restored where quantity supplied and quantity demanded are equal.

  • If quantity demanded is less than the quantity supplied, there is a surplus, and the price will go down until balance is restored where quantity supplied and quantity demanded are equal.

  • Price is the adjustment mechanism.