Economics / Unit 4: Supply and Market Equilibrium
4.4 Market Equilibrium
Notes
Equilibrium is the price where quantity demanded equals quantity supplied. On a graph it is where the demand and supply curves cross.
- Above equilibrium, quantity supplied is greater than quantity demanded: a surplus, which pushes the price down.
- Below equilibrium, quantity demanded is greater than quantity supplied: a shortage, which pushes the price up.
- Markets tend to move toward equilibrium as sellers adjust prices.
| Price | Quantity demanded | Quantity supplied |
|---|---|---|
| $2 | 900 | 300 |
| $3 | 750 | 450 |
| $4 | 600 | 600 |
| $5 | 450 | 750 |
| $6 | 300 | 900 |
- In the table, equilibrium is $4 with 600 units. At $2 there is a shortage of $900 - 300 = 600$ units. At $6 there is a surplus of $900 - 300 = 600$ units.
- With equations, set them equal. If $Q_d = 120 - 4P$ and $Q_s = 20 + 6P$, then $120 - 4P = 20 + 6P$, so $100 = 10P$ and $P = 10$. Then $Q = 120 - 4(10) = 80$.
Practice
At a price of $3, quantity demanded is 750 and quantity supplied is 450. The market has:
Buyers want 300 more units than sellers offer, so sellers can raise the price.
Demand is $Q_d = 200 - 5P$ and supply is $Q_s = 50 + 10P$. What is the equilibrium price and quantity?
$200 - 5P = 50 + 10P \Rightarrow 150 = 15P \Rightarrow P = 10$, and $Q = 200 - 50 = 150$.
At the current price of concert T-shirts, many shirts are left unsold. What will most likely happen?
Unsold goods are a surplus, which pushes the price down toward equilibrium.
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