Study Notes on Market Equilibrium Concepts and Demand Shifts

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Market Equilibrium Concepts (Figure 2.7-3)

Introduction to Market Equilibrium

  • The equilibrium in a market is the point where the quantity demanded equals the quantity supplied.

    • This balance dictates the prices and quantities in any market setting.

Case Study: Lumber Market

Shift in Demand Due to Substitute Prices

  • Initial Equilibrium Point: E₁

  • The scenario shows the market for lumber adjusting due to changes in the price of a substitute, wood composites.

1. Rise in the Price of Wood Composites

  • Effect on Demand:

    • The demand curve (
      D₁
      ) shifts rightward to (
      D₂
      ).

  • Consequence of Shift:

    • At the original price (
      P₁
      ), a shortage occurs represented by (QD - Q1).

    • The price of lumber rises, prompting an increase in quantity supplied.

  • New Equilibrium Point: E₂

    • Higher equilibrium price (
      P₂
      ) and quantity (
      Q₂
      ).

2. Fall in the Price of Wood Composites

  • Effect on Demand:

    • The demand curve (
      D₁
      ) shifts leftward to (
      D₂
      ).

  • Consequence of Shift:

    • At the original price (
      P₁
      ), a surplus occurs depicted by (Q1 - QD).

    • The price of lumber falls, causing a decrease in quantity supplied.

  • New Equilibrium Point: E₂

    • Lower equilibrium price (
      P₂
      ) and quantity (
      Q₂
      ).

Summary of Demand Changes and Market Equilibrium

  • Increase in Demand:

    • Results in a rightward shift of the demand curve leads to a rise in both equilibrium price and quantity.

    • This indicates an effective market demand greater than supply at initial prices, thus adjusting towards equilibrium.

  • Decrease in Demand:

    • Results in a leftward shift of the demand curve leading to a fall in both equilibrium price and quantity.

    • This indicates an excess supply at initial prices that requires adjustments towards a new equilibrium.