Download Unit 5: Equilibrium Lesson 5.1: Equilibrium 1 What You Will Learn

Unit 5: Equilibrium
Lesson 5.1: Equilibrium
What You Will Learn!
• Equilibrium is the point where the demand and supply curves meet. At that
point, both quantity demanded and quantity supplied are equal at a certain
price. SS.912.E.1.4.
• Depending on the price, you may have equilibrium, shortage, or surplus.
SS.912.E.1.4.
Key Point #1. Equilibrium is the point where the demand and supply curves
meet. At that point, both quantity demanded and quantity supplied are equal
at a certain price.
Equilibrium: Greatest Love Story of All Time
If you ever get a moment, take some time to watch When Harry Met Sally, quite
possibly the greatest romantic comedy ever made. It has everything you could want in
a romantic comedy: arguments, falling in love, philosophical discussions about men
and women, explosions, zombies, and Transformers (no, not really), and yes, even a
wonderful happy ending with a final kiss to say those three little words that make our
insides go all gooshy, “I love you.”
In short, equilibrium.
Okay, not exactly equilibrium, but the idea is there. I think of equilibrium as the
greatest economic love story of all time. It has all the elements: arguments about price
being too high and too low, where ultimately the price should be, and yes, even a
romantic kiss where both buyers and sellers are happy. That’s equilibrium.
So how do we get everybody to be happy? How do we get to this kissing point?
Well, this may not come as a big shock to you, but we have to combine the demand and
supply curves together to get equilibrium. Okay, so what is equilibrium? Equilibrium is
the point where the demand and supply curves meet. At that point, both quantity
demanded and quantity supplied are equal at a certain price. Let’s take a look at the
demand and supply schedule and graph for tacos below, starting with the graph.
Demand and Supply Schedule
For Tacos
P
QD QS MATH!
Situation
$2 100 20
QD > QS Shortage
$4 80 40
$6 60 60 QD = QS Equilibrium
$8 40 80
QS > QD
Surplus
$10 20 100
This is the market demand and supply graph for tacos at Atlantic High School.
This graph is no different from the previous demand or supply graphs you’ve seen. The
only difference is that you’re combining the supply and demand curves together on one
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Unit 5: Equilibrium
Lesson 5.1: Equilibrium
graph. The laws of demand and supply still apply, and remain the same. There’s a
minor change to the x-axis in that instead of writing either QD or QS for quantity
demanded or quantity supplied, we’re simply going to write “Q” because we can tell
from the graph that we’re talking about both quantity demanded and quantity supplied.
The big change has to do with equilibrium. First off, notice the point where the
demand and supply curves meet, marked as Point E. E, not surprisingly, stands for
equilibrium. At equilibrium, we have both an equilibrium price, PE, and an equilibrium
quantity, QE. Equilibrium price and quantity are also referred to as market price and
market quantity because they are what the market is willing to pay for a certain amount.
You might also hear the term market-clearing price. On this graph for the Atlantic
Sharks, their equilibrium price is $6.00, and their equilibrium quantity is 60 tacos, which
amounts to a happy taco feeding frenzy.
Now let’s take a look at the schedule, which is the data we used to make the
Sharks’ demand and supply graph for tacos. Looking at the price of $6.00, we see that
the quantity demanded and quantity supplied for tacos is equal. We can express this
mathematically as QD = QS. Again, at the price where quantity demanded equals
quantity supplied, there is equilibrium, and this corresponds to the equilibrium point on
the graph, Point E.
Awesome. Why do we care about equilibrium? Equilibrium is ultimately how we
determine the market price of a good or service, that is, how much the market’s willing
to pay for something. You are surrounded by equilibria any time you walk into a store.
Every time you see a price at Winn-Dixie, you’re staring at equilibria. Ultimately,
equilibrium is the place where buyers and sellers are happiest. Buyers are buying the
good they want to buy at the price they want to buy it for. Sellers are selling the good
they want to sell at the price they want to sell it for. In terms of When Harry Met Sally,
it’s the kissing point where everyone falls in love. However, like in any good romance,
we’re not always happy. Sometimes we’re arguing, sometimes we’re in disequilibrium.
Key Point #2. A shortage occurs when the quantity demanded is greater
than the quantity supplied at a certain price.
Key Point #3. Shortages occur when the price is set below equilibrium.
Key Point #4. To find the amount of the shortage, subtract quantity supplied
from quantity demanded. Shortage = QD - QS
Take a look at what happens at the other prices outside of equilibrium. When
prices are not at equilibrium, we are in a state of disequilibrium. Disequilibrium occurs
when quantity demanded and quantity supplied are not equal at a certain price.
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Unit 5: Equilibrium
Lesson 5.1: Equilibrium
Demand and Supply Schedule
P
QD QS MATH!
Situation
$2 100 20
QD > QS Shortage
$4 80 40
$6 60 60 QD = QS Equilibrium
$8 40 80
QS > QD
Surplus
$10 20 100
For example, when prices are below the equilibrium or market price of $6.00, at
$2.00 and $4.00, we suddenly have a lot of hungry Sharks, demanding more and more
tacos. However, taquerias, which are Mexican restaurants specializing in tacos, are not
willing to make all that many tacos at those prices. So we have a lot more quantity
demanded of tacos than we actually have quantity supplied of tacos. As a result, there
is a taco shortage. A shortage occurs when the quantity demanded is greater than the
quantity supplied at a certain price. A shortage is often referred to as excess demand.
Shortages can occur when the price of the product is set below market equilibrium.
Taking a look at the supply and demand graph again, turns out that in the Sharks’
taco market, the price has been set below the market price of $6.00 to $4.00.
Remember, $6.00 is the market price, where buyers and sellers are both happiest. At
$4.00, the quantity of tacos demanded by the Sharks is greater than the quantity
supplied by the taquerias. At $4.00, quantity demanded is 80 tacos, but the quantity
supplied is only 40 tacos. We can write this as QD > QS. This amount between the
quantity demanded and the quantity supplied represents the amount of tacos we’re
short, and since we have numbers, we can actually figure out the exact number. We
subtract the quantity supplied from the quantity demanded, or
Shortage = QD - QS
Shortage = 80 – 40
Shortage = 40 tacos
So at $4.00, we have a shortage of 40 tacos, which we can safely assume will make for
some 40 angry and hungry Sharks.
Shortages in a market are inefficient because there’s not enough of the product
to meet everybody’s demand for it. Prices are below what the overall market is willing
to pay for the product, and that reduces the incentive for producers to make it, but at the
same time, increases the quantity demanded that consumers want. So how do we
solve this? Producers are going to raise prices until the excess demand is reduced and
the needs of the buyers are met. In our taco market, the taquerias will begin raising the
price until it reaches $6.00. At that price, the taquerias will be able to keep up with the
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Unit 5: Equilibrium
Lesson 5.1: Equilibrium
Sharks’ demand, as fewer Sharks will be willing to buy it at the higher price, and they’ll
substitute something else for it.
Key Point #5. A surplus occurs when the quantity supplied is greater than
the quantity demanded at a certain price.
Key Point #6. Surpluses occur when the price is set above equilibrium.
Key Point #7. To find the amount of the surplus, subtract quantity demanded
from quantity supplied. Surplus = QS – QD
Demand and Supply Schedule
P
QD QS MATH!
Situation
$2 100 20
QD > QS Shortage
$4 80 40
$6 60 60 QD = QS Equilibrium
$8 40 80
QS > QD
Surplus
$10 20 100
Now let’s take a look at the Sharks’ taco market when prices are set too high,
that is above market price. In the graph, the market price, where buyers and sellers are
happiest, is still $6.00, but the price has been set above equilibrium at $8.00. At $8.00,
taquerias are willing to make a lot more than they were at prices below. However, the
Sharks, hungry as ever, are not all that willing to pay the higher price. So we have a lot
more quantity supplied of tacos than we have actually have quantity demanded of tacos.
As a result, there is a taco surplus. A surplus occurs when the quantity supplied is
greater than the quantity demanded at a certain price. A surplus is often referred to as
excess supply. Surpluses occur when the price is set above equilibrium.
Looking at the supply and demand graph one more time, the Sharks’ taco market
now has a price set at $8.00, which is $2.00 more than the equilibrium price. At $8.00,
the quantity of tacos supplied by taquerias is greater than the quantity demanded by the
Sharks. At $8.00, quantity supplied is greater than quantity demanded. We can write
this as QS > QD. This amount between the quantity supplied and the quantity
demanded represents the amount of tacos that we’ve got extra, and since we have
numbers, we can actually figure out the exact amount of the surplus. We subtract the
quantity demanded from the quantity supplied, or
Surplus = QS - QD
Surplus = 80 – 40
Surplus = 40 tacos
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Unit 5: Equilibrium
Lesson 5.1: Equilibrium
So at $8.00, we have a surplus of 40 tacos, which will unfortunately go to waste as
some Sharks will go tacoless rather than pay $8.00.
Surpluses in a market are inefficient because there’s too much of the product
made by producers. Prices are above equilibrium, which increases the amount
producers are willing to make, but reduces the incentive for consumers to buy it. So
how do we solve this? Producers are going to lower prices until the excess supply is
reduced and the needs of the buyers are met. Going back to tacos, one more time, the
taquerias will begin lowering the price until it reaches $6.00. At that price, the taquerias
will be able to keep up with the Sharks’ demand, as more Sharks will be willing to buy it
at the lower price. Raising prices may not seem like a good idea, but the alternative is a
bunch of tacos leftover. Generally, old tacos are not exactly appealing, and tacos,
despite their delicious nature, do not last forever.
Neither does equilibrium, and that’s the
point of all this. Equilibrium is the point where
both buyers and sellers are happiest, but we’re
not always there.
The regular interaction
between buyers and sellers in the market
determines prices, and prices change all the time.
Sometimes the new price will be higher than what
people are willing to pay, so the number of
people in the market is reduced. Sometimes the
new price will be lower, and that can attract new
customers. In other words, whenever we’re in
disequilibrium—when we have a shortage or surplus—we can count on prices to
change and go back to equilibrium. We’re always trying to get back there because
that’s where buyers and sellers are happiest. Equilibrium is the place where buyers
want to buy the good they want to buy at the price they want to buy it for, and where
sellers want to sell the good they want to sell at the price they want to sell it for. Nobody
is better off and nobody is worse off. It is, in the end, the great love story of economics.
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