Price & The Market Equilibrium
Demand & Supply

 Demand and Supply interact and determine the
price of a product, and the quantity bought or sold.
 With competition, neither buyers (Demand) or
sellers (Supply) decide the price.
 Price and Quantity are determined by the forces of
the market. Naturally, it is where supply and
demand intersect. The interests of buyers and sellers
meet at the Equilibrium.
What is the Right Price?

Equilibrium

 The Equilibrium Price (EP) is the price in a
competitive market at which the quantity demanded
and the quantity supplied are equal.
 The Equilibrium Quantity (EQ) is the quantity
demanded and supplied at the equilibrium price in a
competitive market.
EP & EQ (P* or Q*)

Shortage & Surplus

 When the price is not at an optimal level, we will
have either a shortage or a surplus.
 If the quantity demanded is higher than the quantity
supplied at a certain price, we will have a shortage
(not enough to buy – long line-ups and crowds).
 If the quantity demanded is lower than the quantity
supplied at a certain price, we will have a surplus
(too much to sell – deep discounts and bargain bins).
Shortage

 The amount by which
the quantity demanded
exceeds the quantity
supplied at a given
price.
 This price must be
below P*, otherwise
there would be
incentive for suppliers
to make more.
Surplus

 The amount by which
the quantity supplied of
a product exceeds the
quantity demanded at
a given price.
 The price must be
above P*, otherwise
households would
incentivized to buy
more.
Rationing Function of Prices

 It is the ability of market forces in a competitive
market to equalize quantity demanded and quantity
supplied and to eliminate shortages via changes in
prices.
 The combination of freely made individual decisions
sets a market clearing price. A surplus will drive
prices lower and a shortage will drive them higher.
 In your table groups, complete Key Question 7 (p.71)
and be prepared to explain it soon.
Changes in Supply, Demand,
and Equilibrium.

 Demand can change because fluctuations in the
Determinants of Demand. (Review Them). P.56.
 Supply might change because fluctuations in the
Determinants of Supply. (Review Them). P.59-60.
 Changes in demand or supply will have an effect on
both the equilibrium price and equilibrium quantity.
It is important to be able to track both.
Changes in Demand

 An increase in demand
results in a higher
equilibrium price and a
higher equilibrium
quantity.
 A decrease in demand
results in a lower
equilibrium price and a
lower equilibrium
quantity.
 Here is an increase in
Gasoline Demand.
Changes in Supply

 An increase in supply
results in a lower
equilibrium price and a
higher equilibrium
quantity.
 A decrease in supply
results in a higher
equilibrium price and a
lower equilibrium
quantity.
Complex Cases

1. Supply Increase & Demand Decrease
2. Supply Decrease & Demand Increase
3. Supply Increase & Demand Increase
4. Supply Decrease & Demand Decrease
Do not try and memorize results. DRAW THEM OUT.
Below illustrates why it is so important to sketch them.
The Effects Tabulated: What Does it
Mean to be Indeterminate?

Group Work & Assignment Questions

 In your table groups, complete Key Question # 8,
draw a diagram for each question and be prepared
for a random group member to show and explain the
work.
 Individually, complete questions 9, 10, 11, and 12 to
be handed in.