TOPIC 4: Equilibrium Price and Quantity & Elasticity of Demand and Supply

Equilibrium Price and Quantity

  • In markets where goods and services are being sold, also known as output or product/goods markets, firms are the producers of outputs, while households buy them

  • In markets where the factors of production (like labor or capital) are sold, also called input or factor markets, households sell resources to firms

  • We shall assume that in these markets, neither the buyer nor the seller can influence the market price


  • Example:

  • Maria

Price in Php

30

40

50

60

70

Quantity supplied in pieces

10

12

14

16

18

  • Luigi

Price in Php

30

40

50

60

70

Quantitydemanded  in pieces

24

18

14

10

6


  • By inspection, we can see that the quantity supplied by Maria is equal to the quantity demanded by Luigi when the price is at Php 50.00. This means that both of them agree to buy and sell 14 pieces of cupcakes at a price of Php 50.00. This implies that this price-quantity combination is the most likely market outcome in this case. We call this situation the market equilibrium


  • Market equilibrium is achieved when both buyers and sellers in the market agree to buy and sell a resource at a particular price

  • At the equilibrium price, the amount that buyers want to buy is just equal to the amount that sellers want to sell

  • We call this situation an equilibrium because when the forces of demand and supply are in balance, there is no reason for prices to change as long as other things remain unchanged


  • In summary, market equilibrium is the condition when both buyers and sellers in the market agree to buy and sell a quantity of a resource (known as the equilibrium quantity or Q*) at a particular price (known as the equilibrium price or P*). When the forces of demand and supply are balanced, there is no reason for prices to change as long as other things remain unchanged. Graphically, the market equilibrium is represented by the intersection of the supply and demand curves


Elasticity of Demand and Supply


  • Elasticity is the measure of the responsiveness of one variable to changes in another

    • Price Elasticity (Ep)

    • Income Elasticity (Ey)

    • Cross Elasticity (Exy)


  • Price elasticity of demand is the responsiveness of a product’s price to changes in quantity demanded


  • The value of elasticity is negative because the price and quantity demanded are inversely related 


  • Elasticity is talked about in absolute terms