Download Equilibrium Price and Quantity

Equilibrium Price and Quantity
Equilibrium means a state of equality between demand and supply. Without a
shift in demand and/or supply there will be no change in market price.
In the diagram above, the quantity demanded and supplied at price P1 are equal.
At any price above P1, supply exceeds demand and at a price below P1, demand
exceeds supply. In other words, prices where demand and supply are out of
balance are termed points of disequilibrium. Changes in the conditions of demand
or supply will shift the demand or supply curves. This will cause changes in the
equilibrium price and quantity in the market.
Market Mechanism
When buyers (demand) and sellers (supply) meet to exchange goods and services
we have a market as shown in the diagram below.
Price equilibrium is found where supply and demand are equal. This is the point
where both sellers and buyers are happy with the price and quantity.
EXAMPLE 1
In the example above equilibrium price is £0.35 and 250 mars bars would be
demanded at this price.
- If price was £0.40 demand would be less than supply and the market wouldn’t be
in equilibrium
- If the price was £0.20, demand would be greater than supply and the market
wouldn’t be in equilibrium
WHEN PRICE IS NOT AT EQUILIBRIUM
EXCESS SUPPLY
In the first example
EQUILIBRIUM is at £0.35 SUPPLY = DEMAND
However at £0.40 it is not at equilibrium SUPPLY (300) is greater than DEMAND
(200)
Therefore we have EXCESS SUPPLY. Price needs to FALL
EXCESS DEMAND
In the first example
EQUILIBRIUM is at £0.35 SUPPLY = DEMAND
However at £0.25 it is not at equilibrium SUPPLY (150) is less than DEMAND (350)
Therefore we have EXCESS DEMAND. Price needs to INCREASE