Download Equilibrium

EQUILIBRIUM
MARKET DEMAND
This is the total demand of all individual consumers in
a market at a given time for all prices.
 It is found by horizontally adding all individual
demand schedules or curves

P
2
+
1
2
P
2
2
=
1
D
1
P
Q
D
1
2 Q
D
1
2
4
Q
MARKET SUPPLY
This is the total Supply of all individual producers in a
market at a given time for all prices.
 It is found by horizontally adding all individual supply
schedules or curves

P
P
2
S
1
+
P
S
2
=
2
Q
S
1
1
1
2
1
2 Q
2
4
Q
WHERE DEMAND AND SUPPLY
MEET



Equilibrium is the point where Demand and
Supply cross
Market equilibrium determines the price
At this price quantity supplied exactly equals
quantity demanded so everyone prepared to buy
at that price gets what they want and everyone
prepared to sell at that price does.
MARKET EQUILIBRIUM
Market equilibrium occurs at
the price where the quantity
demanded equals the
quantity supplied.
P
s
This occurs at Pe.
Pe
At this price both quantity
demanded and quantity
supplied is Qe.
d
Q
Qe
Equilibrium is a state of
balance. There are no
shortages or surpluses.
CHANGES TO EQUILIBRIUM
A change to any of the variables that cause a shift in either demand
or supply will cause a change in the equilibrium price and quantity.
Factors that shift the demand curve
• Tastes and preferences
• Income
• Complements
• Substitutes
Factors that shift the supply curve
• Price of related good
• Technology
• Productivity
• Cost of Production
EXAMPLE – CHANGES IN DEMAND
An increase in demand
caused by an increase
in consumer incomes
Price
($)
At the new
equilibrium
prices have
increased
and quantity
has
increased
s
P1
Pe
d
d'
Q
Qe
Q1
EXAMPLE – CHANGES IN SUPPLY
A decrease in supply
caused by cost of
production increasing
s’
s
Price
($)
Pe’
Pe
d
Qe’
Qe
At the new
equilibrium price
has increased
and quantity has
decreased
EXCESS SUPPLY (SURPLUS)
s
P
At price p* quantity demanded
(Qd) is less than quantity
supplied (Qs).
There is an oversupply or a
glut. (of Qs - Qd)
P*
The market is in disequilibrium
and is not stable.
Market forces ( excess supply)
will tend to force prices down.
d
0
Qd
Qs
Q
EXCESS SUPPLY




This is not a stable price
The producer will want to sell their excess stock
so they will drop the price
Consumers will react to lower prices by buying
more (move along the curve)
This will continue until equilibrium is regained
where supply equals demand
EXCESS DEMAND (SHORTAGE)
At price P* quantity
demanded is greater than
quantity supplied.
S
P
There are shortages (of Qd Qs).
At this price there is not
enough quantity supplied to
satisfy the quantity
demanded.
P*
D
0
Qs
Qd
Q
The excess demand tends to
push prices up.
EXCESS DEMAND




This is not a stable price
The Consumers want to buy more of the goods so
they are prepared to pay higher prices (move
along the curve)
Producers will react to higher prices by supplying
more (move along the curve)
This will continue until equilibrium is regained
where supply equals demand
MARKET REACTIONS TO DISEQUILIBRIUM




When the market is not in equilibrium we call this a
disequilibrium.
When the market is in a disequilibrium, there will be
pressure on the market.
These pressures are from the needs of consumers for goods
and services (demand) and the need of producers to sell
their goods and services (supply)
These pressures are known as
market forces or ‘the invisible hand’.