Market Equilibrium
Equilibrium is a situation in which there is no tendency for change. The market will be in equilibrium when there is no reason for the market price of the product to rise or to fall. This occurs at the price at which the quantity demanded equals quantity supplied. At this price, the amount that consumers wish to buy is exactly the same as the amount that producers wish to sell. There are no unsatisfied buyers: buyers are able to purchase all they want to at that price. There are no unhappy sellers: producers are able to sell all they want to at that price.
Quantity Demanded Price Quantity Supplied
4 $2.50 14 excess supply price falls
6 2.00 11 excess supply price falls
8 1.50 8
10 1.00 5 excess demand price rises
12 0.50 2 excess demand price rises
Equilibrium occurs at a price of $1.50. The equilibrium quantity is 8 slices of pizza. When the price is above the equilibrium of $6, quantity supplied is greater than quantity demanded. Firms are unable to sell all they want to at that price. There is an excess supply or a surplus and there is pressure for the price to fall. If the price is below equilibrium, there is excess demand or a shortage and this creates pressure for the price to rise. Only at the equilibrium price is there no pressure for price to rise or fall.
Supply and Demand Curves
Demand and supply curves are simply graphs of demand and supply schedules. Equilibrium occurs where the supply and demand curves intersect at an equilibrium price of $1.50 and an equilibrium quantity bought and sold of 8 slices. Excess supply or excess demand at any price is simply the horizontal distance between the supply and demand curves.
Shifts of the Demand Curve
A change in the price of a good causes a movement along the demand curve for that good. The quantity demanded changes but demand is unchanged.
An increase in demand means that consumers wish to purchase more of the good at each possible price than before. Graphically, the demand curve shifts up to the right.
A decrease in demand, on the other hand, means that people wish to purchase less of this good at every price than before. The demand curve shifts down to the left.
Things that Shift the Demand Curve
A change in the price of a good causes a movement along the demand curve for that good. The quantity demanded changes but demand is unchanged. A change in anything else that effects the demand for the good causes its demand curve to shift.
changes in tastes/preferences
in favor
demand increases
away demand decreases
changes in income
normal goods
income demand increases
income demand decreases
inferior goods
income demand decreases
income demand increases
