Supply, Demand, and Market
Equilibrium
Market Equilibrium:
• A competitive market is in equilibrium
when price has moved to a level at
which the quantity of a good or service
demanded equals the quantity of that
good or service supplied.
What determines the
price at which a good or
service is bought and
sold?
What determines
the quantity
transacted of the
good or service?
Market Equilibrium:
• The price that matches the quantity
supplied and the quantity
demanded is the equilibrium price
• The quantity bought and sold at
that price is the equilibrium
quantity.
Equilibrium Price:
• This is also known as the marketclearing price – it is the price that “clears
the market” by ensuring that every
buyer willing to pay that price finds a
seller willing to sell at that price
• How do we find the equilibrium price?
Finding Equilibrium Price and Quantity
• Easiest way, putting the supply curve and
demand curve on the same diagram
• Supply curve shows the quantity supplied at
any given price
• Demand curve shows the quantity demanded
at any given price
• The price where both meet is the equilibrium
price – where quantity supplied equals
quantity demanded
Finding Equilibrium Price and Quantity
Demand Curve for
Coffee Beans
Supply Curve for
Coffee Beans
Market Equilibrium
Price of coffee
beans (per
pound)
Supply
$2.00
1.75
1.50
Market equilibrium
occurs at point E, where
the supply curve and
the demand curve
intersect.
1.25
Equilibrium
price
E
1.00
Equilibrium
0.75
0.50
0
Demand
7
10
Equilibrium
quantity
13
15
17
Quantity of coffee beans
(billions of pounds)
Questions on Equilibrium Price:
1. Why do all sales and purchases in a
market take place at the same price?
2. Why does the market price fall if it is
above the equilibrium price?
3. Why does the market price rise if it is
below the equilibrium price?
1. Why do all sales and purchases in a market
take place at the same price?
• In any market where the buyers and
sellers have both been around for
awhile, sales and purchases tend to
converge at a generally uniform price –
the market price
2. Why does the market price fall if it is above
the equilibrium price?
• Point E is the
market
equilibrium
• What is the new
supply?
• What is the new
demand?
This is called a surplus!
A surplus is when a good or service quantity supplied
exceeds the quantity demanded. This occurs when the
price is above its equilibrium level.
3. Why does the market price rise if it is below
the equilibrium price?
• Point E is the
market equilibrium
• What is the new
quantity
demanded?
• What is the new
quantity supplied?
This is called a shortage.
A shortage occurs when a good or service quantity
demanded exceeds the quantity supplied. Shortages
occur when the price is below its equilibrium level.
Questions:
• In the following three situations, the
market is initially in equilibrium. After
each event described below, does a
surplus or a shortage exist at the
original equilibrium price? What will
happen to the equilibrium price as a
result?
a. Shortage
b. Surplus
c. what happens to
equilibrium price?
1. 2005 was a very good year for California
wine-grape growers, who produced a
bumper crop.
2. After Hurricane Liz, Florida hoteliers often
find that many people cancel their
upcoming vacations, leaving them with
empty hotel rooms.
3. After a heavy snowfall, many people want
to buy secondhand snow blowers at the
local tool shop.
Changes in Supply and Demand Curves
• What happens when the supply curve
changes but the demand curve does
not? What about the other way
around?
• When one curve shifts, it alters the
equilibrium price and quantity.
Demand Curve Shifts
• Coffee and Tea are substitutes.
• If the price of tea rises, the demand for
coffee will increase
• If the price of tea falls, the demand for coffee
will decrease
• How does the price of tea affect the market
equilibrium for coffee?
Equilibrium and Shifts of the Demand Curve
Price of
coffee beans
An increase in
demand…
E
P
Price
rises
… leads to a
movement along the
supply curve due to a
higher equilibrium
price and higher
equilibrium quantity
2
2
E
P
Supply
1
1
D
D
Q
1
Q
2
Quantity rises
2
1
Quantity of coffee beans
Demand Curve Shifts
• Basic principle to remember:
When demand for a good or service increases,
the equilibrium price and the equilibrium
quantity of the good or service both rise
Demand Curve Shifts
• What about the reverse, fall in the price of
tea?
 Reduces demand for coffee and shifts the demand
curve to the left
 Based on the original price, a surplus occurs as
quantity supplied exceeds quantity demanded
 The price falls and leads to a decrease in the
quantity supplied
 Results are a lower equilibrium price and a lower
equilibrium quantity
Demand Curve Shifts
• Basic principle to remember (previous slide):
– When demand for a good or service increases,
the equilibrium price and the equilibrium
quantity of the good or service both rise
• Second basic principle to remember:
– When demand for a good or service decreases,
the equilibrium price and the equilibrium
quantity of the good or service both fall
Supply Curve Shifts
• A drought in Vietnam sharply reduced
its supply of coffee beans.
• How has this affected the market
equilibrium?
Equilibrium and Shifts of the Supply Curve
Price of
coffee
beans
S
2
P
S
1
E
2
2
… leads to a movement
along the demand
curve due to a higher
equilibrium price and
lower equilibrium
quantity
Price
rises
P
A
decrease
in
supply…
E1
1
Demand
Q
2
Q
1
Quantity
falls
Quantity of coffee
beans
Supply Curve Shifts
• General Principle to Remember:
– When supply of a good or service
decreases, the equilibriu8m price of the
good or service rises and the equilibrium
quantity of the good or service falls.
Supply Curve Shifts
• What happens to the market when the
supply increases?
Increase in supply leads to a rightward
shift of the supply curve
At the original price, a surplus exists
Due to the surplus, the equilibrium
price falls and the quantity demanded
rises
Supply Curve Shifts
• General Principle to Remember:
– When supply of a good or service decreases, the
equilibriu8m price of the good or service rises
and the equilibrium quantity of the good or
service falls.
• Second Principle to Remember:
– When supply of a good or service increases, the
equilibrium price of the good or service falls and
the equilibrium quantity of the good or service
rises.
Supply and Demand BOTH shifting
• An event happens and it can shift both
the demand and supply curves at the
same time
Simultaneous Shifts of Supply and Demand
One possible outcome: Price Rises, Quantity Rises
Price of coffee
Small decrease
in supply
E
P
2
E
P
2
S
2
S
1
The increase
Two
opposinginforces
demand
determiningthe
dominates
thedecrease
equilibrium
in
supply. quantity.
1
1
D
D
2
1
Large increase
in demand
Q
1
Q2
Quantity of coffee
Simultaneous Shifts of Supply and Demand
Another Possibility Outcome: Price Rises, Quantity Falls
Price of coffee
Large
decrease
in supply
S
2
S
E
P
2
Two opposing forces
determining the
equilibrium quantity.
2
E
P
1
Small increase
in demand
1
1
D
D
Q
2
Q
1
2
1
Quantity of coffee
Supply, Demand, and Market
Equilibrium Notes
Market Equilibrium:
• A competitive market is in equilibrium
when price has moved to a level at
which the quantity of a good or service
demanded equals the quantity of that
good or service supplied.
What determines the
price at which a good or
service is bought and
sold?
What determines
the quantity
transacted of the
good or service?
Market Equilibrium:
• The price that matches the quantity
supplied and the quantity
demanded is the equilibrium price
• The quantity bought and sold at
that price is the equilibrium
quantity.
Equilibrium Price:
• This is also known as the marketclearing price –
• How do we find the equilibrium price?
Finding Equilibrium Price and Quantity
• Easiest way, putting the supply curve and
demand curve on the same diagram
• Supply curve
• Demand curve
• The price where both meet is the equilibrium
price –
Finding Equilibrium Price and Quantity
Demand Curve for
Coffee Beans
Supply Curve for
Coffee Beans
Market Equilibrium
Price of coffee
beans (per
pound)
Supply
$2.00
1.75
1.50
1.25
E
1.00
0.75
0.50
0
Demand
7
10
13
15
17
Quantity of coffee beans
(billions of pounds)
Questions on Equilibrium Price:
1. Why do all sales and purchases in a
market take place at the same price?
2. Why does the market price fall if it is
above the equilibrium price?
3. Why does the market price rise if it is
below the equilibrium price?
1. Why do all sales and purchases in a market
take place at the same price?
• In any market where the buyers and
sellers have both been around for
awhile, sales and purchases tend to
converge at a generally uniform price –
the market price
2. Why does the market price fall if it is above
the equilibrium price?
• Point E is the
market
equilibrium
• What is the new
supply?
• What is the new
demand?
This is called a surplus!
3. Why does the market price rise if it is below
the equilibrium price?
• Point E is the
market equilibrium
• What is the new
quantity
demanded?
• What is the new
quantity supplied?
This is called a shortage.
Questions:
• In the following three situations, the
market is initially in equilibrium. After
each event described below, does a
surplus or a shortage exist at the
original equilibrium price? What will
happen to the equilibrium price as a
result?
a. Shortage
b. Surplus
c. what happens to
equilibrium price?
1. 2005 was a very good year for California
wine-grape growers, who produced a
bumper crop.
2. After Hurricane Liz, Florida hoteliers often
find that many people cancel their
upcoming vacations, leaving them with
empty hotel rooms.
3. After a heavy snowfall, many people want
to buy secondhand snow blowers at the
local tool shop.
Changes in Supply and Demand Curves
• What happens when the supply curve
changes but the demand curve does
not? What are the other way around?
Demand Curve Shifts
• Coffee and Tea are substitutes.
• How does the price of tea affect the market
equilibrium for coffee?
Equilibrium and Shifts of the Demand Curve
Price of
coffee beans
Supply
E
P
2
E
P
2
1
1
D
D
Q
1
Q
2
2
1
Quantity of coffee beans
Demand Curve Shifts
• Basic principle to remember:
Demand Curve Shifts
• What about the reverse, fall in the price of
tea?
Demand Curve Shifts
• Basic principle to remember (previous slide):
– When demand for a good or service increases,
the equilibrium price and the equilibrium
quantity of the good or service both rise
• Second basic principle to remember:
– When demand for a good or service decreases,
the equilibrium price and the equilibrium
quantity of the good or service both fall
Supply Curve Shifts
• A drought in Vietnam sharply reduced
its supply of coffee beans.
• How has this affected the market
equilibrium?
Equilibrium and Shifts of the Supply Curve
Price of
coffee
beans
S
2
P
P
S
1
E
2
2
E1
1
Demand
Q
2
Q
1
Quantity of coffee
beans
Supply Curve Shifts
• General Principle to Remember:
– When supply of a good or service
decreases, the equilibriu8m price of the
good or service rises and the equilibrium
quantity of the good or service falls.
Supply Curve Shifts
• What happens to the market when the
supply increases?
Supply Curve Shifts
• General Principle to Remember:
– When supply of a good or service decreases, the
equilibriu8m price of the good or service rises
and the equilibrium quantity of the good or
service falls.
• Second Principle to Remember:
– When supply of a good or service increases, the
equilibrium price of the good or service falls and
the equilibrium quantity of the good or service
rises.
Supply and Demand BOTH shifting
• An event happens and it can shift both
the demand and supply curves at the
same time
Simultaneous Shifts of Supply and Demand
One possible outcome: Price Rises, Quantity Rises
Price of coffee
S
E
P
S
1
2
2
E
P
2
1
1
D
D
Q
1
2
1
Q2
Quantity of coffee
Simultaneous Shifts of Supply and Demand
Another Possibility Outcome: Price Rises, Quantity Falls
Price of coffee
S
2
S
E
P
2
2
E
P
1
1
1
D
D
Q
2
Q
1
2
1
Quantity of coffee