Supply, Demand and Equilibrium
• In competitive markets the interaction of supply
and demand tends to move toward what
economists call equilibrium
▫ Ex: Shopping Lane
 When no one else can be better off by doing
something different- this is equilibrium
• Concept of equilibrium helps us understand the
price at which a good or service is bought and sold
as well as the quantity transacted of the good or
service
▫ A competitive market is in equilibrium when price has
moved to a level at which the quantity of a good
demand equals the quantity of that good supplied
▫ Price exactly matches the quantity demanded by
consumers to the quantity supplied by the suppliers
 This is equilibrium price
▫ The quantity bought and sold at that price is the
equilibrium quantity
• Equilibrium price is also known as market
clearing price- it ensures that every buyer willing
to pay that price finds a seller willing to sell at
that price and vice versa.
Finding Equilibrium Price and Quantity
• You can use a graph that shows both the supply
curve and demand curve
▫ The place where they intersect is your equilibrium
price
 Where Qs=Qd
How can we be sure the market will
arrive at the equilibrium price?
• 3 simple questions
▫ Why do sellers and purchasers in a market take
place at the same time?
 In any market where the buyers and sellers have
both been around for some time, sales and
purchases tend to converge at a generally uniformed
price
 In a well established ongoing market, all sellers
receive and all buyers pay approximately the same
price. This is known as market price.
▫ Why does the market price fall if it is above the
equilibrium price?
 Because if it is above, you are seeing a surplus or an
excess in supply
 Surplus offers an incentive to sellers to offer a lower
price. This will push prevailing price down until it
reaches the equilibrium price.
▫ Why does the market price rise if it is below the
equilibrium price?
 This is a shortage or an excess in demand
 This means that buyers cannot find willing sellers at
the current price. In this case buyers will offer more
than the prevailing price or sellers will realize they
can charge a higher price. This will move the price
up to equilibrium.
• The market price always moves toward the
equilibrium price. Where there is neither a shortage
nor surplus.
Supply and Demand: Changes in
Equilibrium
• What happens when demand curve shifts?
• Example: Tea and Coffee
• Tea rises in price- Demand for coffee will
increase
▫ This increase is a rightward shift
▫ Market is no longer in equilibrium: creates a
shortage
 Qd>Qs
 Price of coffee will rise and there will be an increase
in quantity supplied- this is an upward movement on
supply curve
• This reflects a general principle: When demand
for a good or service increases the equilibrium
price and equilibrium quantity of the good or
service rise.
• In the reverse cause: the general principle:
When demand for a good or service decreases,
the equilibrium price and equilibrium quantity
of the good or service falls.
• What happens when supply curve shifts?
• Two general principles
▫ When supply of a good or service decreases,
equilibrium price of good or service rises and the
equilibrium quantity falls (leftward shift)
▫ When supply of a good or service increases, the
equilibrium price of the good or service falls and
the equilibrium price of the good or service falls
and equilibrium quantity of the good or service
rises.
• Simultaneous Shifts of Supply and Demand Curves
• Sometimes it happens that an event shifts both the
demand and supply curves at the same times.
• What predictions can we make if they shift in
opposite directions?
▫ When demand increases and supply decreases, the
equilibrium price rises but the change in the
equilibrium quantity is ambiguous.
▫ When demand decrease and supply increases, the
equilibrium price falls but the change in the
equilibrium quantity is ambiguous.
• What predictions can we make if they shift in the
same direction?
▫ When both demand and supply increase, the
equilibrium quantity increases but the change in
equilibrium price is ambiguous.
▫ When both demand and supply decrease, the
equilibrium quantity decreases but the change in
equilibrium price is ambiguous.