Understanding Market Equilibrium
Explore the concept of market equilibrium where supply meets demand, leading to a balance in prices and quantities. Learn about the dynamics of surplus and shortage in the market and how prices adjust to reach equilibrium.
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Presentation Transcript
Supply and Demand Together P Equilibrium: P has reached the level where quantity supplied equals quantity demanded S D $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 2
Equilibrium price: the price that equates quantity supplied with quantity demanded P S D $6.00 P $0 1 2 3 4 5 6 QD 24 21 18 15 12 9 6 QS 0 5 10 15 20 25 30 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 3
Equilibrium quantity: the quantity supplied and quantity demanded at the equilibrium price P S D $6.00 P $0 1 2 3 4 5 6 QD 24 21 18 15 12 9 6 QS 0 5 10 15 20 25 30 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 4
Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Example: If P = $5, then QD = 9 lattes and QS = 25 lattes resulting in a surplus of 16 lattes S D Surplus $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 5
Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Facing a surplus, sellers try to increase sales by cutting price. S D Surplus $6.00 $5.00 $4.00 This causes QD to rise and QSto fall $3.00 which reduces the surplus. $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 6
Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Facing a surplus, sellers try to increase sales by cutting price. S D Surplus $6.00 $5.00 $4.00 This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 7
Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P Example: If P = $1, then QD = 21 lattes and QS = 5 lattes resulting in a shortage of 16 lattes S D $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 Shortage $0.00 Q 0 5 10 15 20 25 30 35 8
Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P Facing a shortage, sellers raise the price, causing QD to fall and QS to rise, S D $6.00 $5.00 $4.00 which reduces the shortage. $3.00 $2.00 $1.00 Shortage $0.00 Q 0 5 10 15 20 25 30 35 9
Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P Facing a shortage, sellers raise the price, causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. S D $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 Shortage $0.00 Q 0 5 10 15 20 25 30 35 10
