Market equilibrium
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Intros
Lessons
- Market Equilibrium Overview:
- Definition of Market Equilibrium
- Equilibrium
- Equilibrium price
- Equilibrium quantity
- Finding the equilibrium price and quantity example
- Regulating Using Price
- Case 1: price is below the equilibrium price
- Case 2: price is above the equilibrium price
- Price Adjustments
- Case 1: shortage forces price up
- Case 2: surplus forces prices down
Examples
Lessons
- Finding the Market Equilibrium
Suppose the demand for ice cream is P = 60 - , and the supply for ice cream is = 10 + 3P. Find the equilibrium price and quantity. - Suppose the demand for chocolate is P = 30 - , and the supply for ice cream is = 10 + P. Find the equilibrium price and quantity.
- Understanding Price Regulations
The price is set below the equilibrium price, then- There is an excess of the product
- There is a shortage of the product
- There is neither an excess or shortage of the product
- The quantity demanded is equal to the quantity supplied
- The demand and supply schedules for phones are:
Price
Quantity Demanded
Quantity Supplied
50
500
200
100
400
300
150
300
400
200
200
500
250
100
600
- Draw a graph for the market of phones and mark the equilibrium price and quantity.
- Suppose the price of phones is $100. Describe the situation of the phone market. Is there an excess or shortage of phones? How much excess or shortage is there?
- Suppose that the price of phones is $200. Describe the situation of the phone market. Is there an excess or shortage of phones? How much excess or shortage is there?
- Understanding Price Adjustments
When there is a shortage of the product, then- The quantity supplied is greater than the quantity demanded.
- The price will decrease until it reaches the equilibrium price.
- The price will increase until it reaches the equilibrium price.
- Suppliers lower their production to increase their equilibrium price.
- The demand and supply schedules for candies are:
Price
Quantity Demanded
Quantity Supplied
10
120
70
20
100
90
30
80
110
40
60
130
50
40
150
- Draw a graph for the market of phones and mark the equilibrium price and quantity.
- Suppose the price of candy is $20. Describe the situation of the candy market and how the price adjusts.
- Suppose that the price of phones is $30. Describe the situation of the candy market and how the price adjusts.
Topic Notes
Definitions of Market Equilibrium
An equilibrium is when two opposing forces balance each other. In this case, the quantity demanded and the quantity supply equal to one another.
Equilibrium Price: the price at which the quantity demanded is equal to the quantity supplied
Equilibrium Quantity: the quality that is bought and sold at the equilibrium price.
In the equilibrium, there is no excess or shortage in the product, and no tendency for the market price to change.
Regulating Using Price
The price of a good controls the quantities that are demanded by consumers and quantities that are supplied by producers. Depending on the price, there might be a shortage of the product, or an excess of the product.
Case 1: Price is set below the equilibrium price. In this case, there is a shortage of the product.
Case 2: Price is set above the equilibrium price. In this case, there is an excess of the product.
Price Adjustments
Prices and quantities always automatically adjust back to the equilibrium because buyers and sellers benefit from it. Let’s look at the two cases above and see how they get adjusted.
Case 1: A shortage of the product
This happens when the quantities demanded is greater than the quantities supplied in the market. In this case, producers notice the unsatisfied customers wanting more, so they produce more of it and increase the price until there is an equilibrium.
Case 2: An excess of the product
This happens when the quantities supplied is greater than the quantities demanded in the market. Since the producers can’t force the consumers to buy more, they lower their production and sell less of it, and decrease the price. They do this until there is an equilibrium.
