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Chapter 6
Equilibrium
Equilibrium
• Price at which the quantity demanded
equals the quantity supplied.
• Intersection of Supply and Demand Curves.
• Represents the “market clearing price”
because it clears the market of the good
or service being sold. All buyers, who were
willing to pay this price, were able to buy
what they wanted. No one went home
empty handed. All sellers, who were
offering to sell at this price, were able to
sell all that they wanted to sell. They
didn’t have anything left over.
Equilibrium (continued)
• Number of points of equilibrium is
always equal to the number of curves
on your graph minus 1 (4 curves – 1 =
3 points of equilibrium in our example)
• E1 = S1 + D1
• E2 = S1 + D2 or E2 = S2 + D1
• E3 = S2 + D2
Equilibrium (continued)
S1
P
E1P =
P1
E1
E1Q =
D1
Q1
Q
Equilibrium (continued)
S1
P
E2
P2
P1
E1P =
E1Q =
E2P =
E2Q =
E1
D2
D1
Q1
Q2
Q
Equilibrium (continued)
S1
P
E2
P2
P1
E1P =
E1Q =
E2P =
E2Q =
E1
D2
D1
Q1
Q2
Q
Equilibrium (continued)
S2
P
P3
E3
S1
E2
P2
E1
P1
E1P =
E1Q =
E2P =
E2Q =
E3P =
E3Q =
D2
D1
Q3
Q1
Q2
Q
Equilibrium (continued)
P2
S1
Surplus
P
E1
P1
D1
Q1
Q
If the price is set above
equilibrium, a surplus will
occur. A surplus is when
the quantity supplied is
greater than the quantity
demanded. The easiest
way to eliminate a surplus
is to lower the price (have
a sale!) The way to
calculate the value of the
surplus is to find the
difference between the
quantity supplied and the
quantity demanded at that
price. (QS – QD)
Equilibrium (continued)
P
P1
P3
If the price is set below
equilibrium, a shortage will
occur. A shortage is when
the quantity demanded is
S1
greater than the quantity
supplied. A shortage can not
be eliminated, but it can be
prevented from reoccurring
E1
again by raising the price.
The way to calculate the
value of the shortage is to
Shortage
D1 find the difference between
the quantity demanded and
Q1
Q the quantity supplied at that
price. (QD – QS)
Equilibrium (continued)
P
P2
P1
Price Floor
S1
Surplus
E1
Q1
D1
Q
Markets will tend toward their
natural equilibrium, if left to their
own devices. Sometimes,
government actions interfere with
the market finding its natural
equilibrium. The government will set
a price floor to protect the
producer. The selling price is not
allowed to drop below this price
(minimum price). This happens with
agriculture and their price supports.
In order to make sure farmers can
make a profit prices are set at a
certain level (above the natural
equilibrium). However, in many
instances, consumers are not willing
to pay these higher prices and an
artificial surplus will be created.
Equilibrium (continued)
S1
P
P1
P3
E1
Shortage
Price
Ceiling D1
Q1
Q
On the other hand, the
government sometimes sets a price
ceiling to protect the consumer.
Now the selling price is not allowed
to rise above this level (maximum
price). This happens with rent
control. If the rents on affordable
apartments in the big cities like
New York were higher, many
consumers would not be able to
afford a home. Because these low
rents (below natural equilibrium)
prevent landlords from making
much of a profit, they do not want
to offer a lot of “low rent”
apartments, so an artificial
shortage occurs.
Equilibrium (continued)
P
P2
P1
P3
Price Floor
S1
E1
Price
Ceiling
Q1
D1
Q
Remember, when you are
working with Price Floors
and Price Ceilings, that
the house is upsidedown. If you can
remember that, you
should not have any
problem. It is the
opposite from the way
we are used to thinking
of floors and ceilings.