Download Equilibrium

Principles of Micro
by Tanya Molodtsova, Fall 2005
Chapter 4: “THE MARKET FORCES OF
SUPPLY AND DEMAND”
III. Supply and Demand
Together: Equilibrium


The point where the supply
and demand curves intersect is
called the market’s equilibrium.
equilibrium: a situation in
which the price has reached
the level where quantity
supplied equals quantity
demanded.
III. Supply and Demand
Together: Equilibrium




equilibrium price: the price that
balances quantity supplied and quantity
demanded.
On a graph, it is the price at which the
supply and demand curves intersect.
equilibrium quantity: the quantity
supplied and the quantity demanded at
the equilibrium price.
On a graph it is the quantity at which
the supply and demand curves
intersect.
III. Supply and Demand
Together
Demand
Schedule
Supply
Schedule
At $2.00, the quantity
demanded is equal to the
quantity supplied!
The Equilibrium of Supply and
Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium price
Equilibrium
$2.00
Equilibrium
quantity
Demand
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
III. Supply and Demand
Together



When market price > the equilibrium
price  there will be a surplus of the
good.
surplus: a situation in which
quantity supplied > quantity
demanded.
To eliminate the surplus, producers
will lower the price until the market
reaches equilibrium.
III. Supply and Demand
Together (a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
III. Supply and Demand
Together



When price < equilibrium price
then there will be a shortage of
the good.
shortage: a situation in which
quantity demanded > quantity
supplied.
Sellers will respond to the shortage
by raising the price of the good until
the market reaches equilibrium.
III. Supply and Demand
Together
(a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
III. Supply and Demand
Together

Law of Supply and Demand:
the claim that the price of
any good adjusts to bring
the supply and demand for
that good into balance.
Three Steps to Analyzing
Changes in Equilibrium:
1.
2.
3.
Decide whether the event shifts
the supply or demand curve (or
both).
Decide in which direction the
curve shifts.
Use the supply-and-demand
diagram to see how the shift
changes the equilibrium price
and quantity.
Shifts in Curves vs.
Movements Along Curves
1.
2.
A shift in the demand curve is
called a "change in demand." A
shift in the supply curve is called a
"change in supply."
A movement along a fixed demand
curve is called a "change in
quantity demanded." A movement
along a fixed supply curve is called
a "change in quantity supplied."
How an Increase in Demand
Affects the Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . .and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
How a Decrease in Supply
Affects the Equilibrium
Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
0
Demand
4
7
3. . . .and a lower
quantity sold.
Quantity of
Ice-Cream Cones
A Change in Both Supply
and Demand


if you do not know the relative
sizes of these shifts, the end
effect on either equilibrium price
or equilibrium quantity will be
ambiguous.
The outcome depends on the
relative sizes of the shifts in
supply and demand