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

Price

Quantity Demanded

Quantity 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

0 100 200 300 400 500 Quantity

$100

$200

$300

$400

$500

Pric

e

Market Equilibrium

MARKET EQUILIBRIUM IN EQUATION FORMQd = 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

0 100 200 300 400 500 Quantity Demanded and Supplied

$1

$2

$3

$4

$5

Price

PRICE OF $2.00 CAUSES SHORTAGE

DemandSupply

Shortage of 200

PRICE ABOVE EQUIULIBRIUM

0 100 200 300 400 500 Quantity Demanded and Supplied

$1

$2

$3

$4

$5

Pric

ePRICE OF $4.00 CAUSES SURPLUS

DemandSupply

Surplus of 200