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Equilibrium
Equilibrium is defined a state of rest;
a situation that, one achieved, will not change,
unless some external factor,
previously held constant, changes.
Market Equilibrium
A market is said to be in equilibrium
if the price in the market is such that
the quantity supplied (QS) in the market
and the quantity demanded (QD) in the market
are equal.
Price
Supply = Demand
3.5
3
2.5
2
1.5
1
D0
S0
0.5
0
2000
4000
3333.33
6000
8000
6666.66
10000 12000
Quantity
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
Excess demand
At a given price, the excess of the
quantity demanded over the quantity supplied
is called the excess demand.
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
Quantity
Price (per lb) supplied
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
1000
2000
3000
4000
5000
6000
7000
8000
9000
Quantity
demanded
9800
8600
7400
6200
5000
3800
2600
1400
200
Market Equilibrium
A market is in equilibrium when the price is
such that the quantity supplied
is equal to quantity demanded.
A market is in equilibrium when the price is
such that excess supply equals
excess demand equals zero.
Price
3.5
3
Supply = Demand
Price Falls
2.5
2
1.5
1
D0
S0
0.5
0
2000
4000
6000
8000
10000 12000
Quantity
Price
3.5
3
Price Rises
2.5
2
1.5
1
D0
S0
0.5
0
2000
4000
6000
8000
10000 12000
Quantity
2.
Demand
Price
QD = 20 - 2P
14
12
10
8
6
4
2
0
D0
8 10 12 14 16 18 20 22 24
Quantity
Supply
Price
QS -4 + 2P
14
12
10
8
6
4
2
0
S0
8 10 12 14 16 18 20 22 24
Quantity
QD = 20 - 2P
QS -4 + 2P
14
12
10
8
6
4
2
0
D0
S0
8 10 12 14 16 18 20 22 24
Quantity
Example Calculation
Set supply equal to demand and solve the equation for P.
QD = 20 - 2P = -4 + 2P = QS
20 - 2P = -4 + 2P
+4
+4
24 - 2P = 2P
+2P +2P
24 = 4P
24 = 4P
4
4
6 = P
QD = 20 - 2P
= 20 2(6)
=8
b.
c.
d.
Comparative Statics or
What happens when things change
Demand Shifts
Increases in demand (shifts to the right)
will increase the equilibrium price and quantity.
Decreases in demand (shifts to the left)
will decrease the equilibrium price and quantity.
Price
Changes in Demand
16
S0
D0
D1
D2
14
12
10
8
6
4
2
0
0
10
15
20
Quantity
25
Supply Shifts
Increases in supply (shifts to the right)
will decrease the equilibrium price
and increase the equilibrium quantity.
Decreases in supply (shifts to the left)
will increase the equilibrium price
and decrease the equilibrium quantity.
Price
Changes in Supply
D0
S0
S2
S1
14
12
10
8
6
4
2
0
0
10
15
20
Quantity
Price Ceilings
A price ceiling occurs when some outside force
sets a price for the market
that is below the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market
whichever of the two quantities is less
will prevail.
Price
Price Ceiling
Supply Demand
3.5
3
Queuing
2.5
2
1.5
1
D0
S0
0.5
0
2000
4000
6000
8000
10000 12000
Quantity
The results:
Queuing
Shortages
A black market
Price Floors
A price floor occurs when some outside force
sets a price for the market
that is above the equilibrium price.
When quantity supplied & quantity demanded differ,
the short side of the market
whichever of the two quantities is less
will prevail.
Price
Price Floor
Supply Demand
3.5
3
Excess Supply
2.5
2
1.5
1
D0
S0
0.5
0
2000
4000
6000
8000
10000 12000
Quantity
The results:
Excess supply
Unemployment