Chapter 4: Equilibrium

Surplus: An excess of supply

• Competition will push prices down whenever there is a surplus.

  • As competition pushes prices down, the quantity demanded will increase the quantity supplied will decrease.

Shortage: An excess of demand.

• When sellers easily sell all of their output but have buyers asking for more RAISE IN PRICES.

• Competition will push prices up whenever there is a shortage.

Equilibrium Price: The price at which the quantity demanded is equal to the quantity supplied.

• EP is stable because at the equilibrium price the quantity demanded is exactly equal to the quantity supplied.

• Sellers can sell as much as they want at EP. Buyers can buy as much as they want at EP.

Equilibrium Quantity: At the equilibrium price the quantity demanded is equal to the quantity supplied.

• Sellers compete with other sellers. Buyers compete with other buyers. There are unexploited gains from trade at any quantity less than the equilibrium price.

• A free market maximizes the gains from trade. A free market maximizes producer + consumer surplus

Vernon Smith :Launches a revolution in economics by testing the supply and demand model in the lab.

A decrease in supply will raise the market price and reduce the market quantity.