Download No Slide Title

MARKET EQUILIBRIUM
Microeconomics Made Easy
by
William Yacovissi
Mansfield University
©William Yacovissi All Rights Reserved
MARKET EQUILIBRIUM
 Market equilibrium is perhaps the most
important concept in economics.
 Demand and supply are independent of each
other. What you will pay for a product
depends on how valuable it is to you, not
what it cost to make it. Likewise, a
willingness to produce and supply a product
is determined by the cost of production.
MARKET EQUILIBRIUM
 How are the differences between demanders
who want to buy at a low price, and
suppliers who want to sell at a high price
reconciled?
 Like any other disagreement, the two sides
negotiate to see if there is a any way they
can agree on a price and a quantity.
MARKET EQUILIBRIUM
 These negotiations take place through the
auction of the marketplace, in which offers
to buy and sell are made.
 If no agreement can be reached on price and
quantity, the negotiations stop, the product
doesn’t get produced, and consumers don’t
get to buy it.
MARKET EQUILIBRIUM
 If an agreement can be reached on price and
quantity, the product gets produced and sold
to everyone’s satisfaction.
 This price and quantity that satisfies the
desires of consumers and the desires of
producers is called the market equilibrium.
MARKET EQUILIBRIUM
 It exists if there is some price and quantity
on the demand curve that is the same as the
price and quantity on the supply curve.
 If this point does not exists, there will be
no market for the product.
MARKET EQUILIBRIUM
 With supply and demand information, the
existence of this point can be quickly
established.
 Using the example of video rentals, it can
easily be seen that a price of $3 and a
quantity of 300 is the market equilibrium.
MARKET EQUILIBRIUM
 In a real market, participants have to
discover what the equilibrium is. This can
be done because any price other than the
equilibrium price results in a surplus or
shortage of the good in the market.
MARKET EQUILIBRIUM IN
TABLE FORM
Quantity
Quantity
Price Demanded Supplied
Surplus/
Shortage
$1.00 500 a day 100 a day
-400
$2.00 400 a day 200 a day
-200
$3.00 300 a day 300 a day
0
$4.00 200 a day 400 a day
+200
$5.00 100 a day 500 a day
+400
MARKET EQUILIBRIUM IN
GRAPH FORM
Market Equilibrium
P r ic e
$500
$400
$300
$200
$100
0
100
200
300
Quantity
400
500
MARKET EQUILIBRIUM IN
EQUATION FORM
Qd = 600 - 100(Price) and Qs = 100(Price)
Set:
Qd = Qs
Substitute: 600 - 100(Price) = 100(Price)
Simplify:
600 = 200(Price)
Solve:
$3 = Price
Qd = 600 - 100(Price)
Qs = 100(Price)
Qd = 600 - 100(3)
Qs = 100(3)
Qd = 300
Qs = 300
MARKET DISEQUILIBRIUM
 A market left alone will automatically move
to a market equilibrium. Why is this so?
 Because any price other than the
equilibrium price results in a surplus or
shortage in the market
MARKET DISEQUILIBRIUM
 The existence of a surplus or shortage
triggers a price change in the right direction
 Can you see why?
 A surplus causes prices to fall and a
shortage causes prices to rise.
PRICE BELOW EQUILIBRIUM
PRICE OF $2.00 CAUSES SHORTAGE
Demand
Supply
P r ic e
$5
$4
$3
$2
Shortage of 200
$1
0
100
200
300
400
Quantity Demanded and Supplied
500
PRICE ABOVE EQUIULIBRIUM
PRICE OF $4.00 CAUSES SURPLUS
Demand
$5
Supply
P r ic e
Surplus of 200
$4
$3
$2
$1
0
100
200
300
400
Quantity Demanded and Supplied
500