Market Equilibrium

Market Equilibrium is reached when quantity demanded

equals quantity supplied
Market of Oranges

P ($/unit) S1 PE1 is the quantity at which Pd1=Ps1

QE1 is the quantity at which Qd1=Qs1
E1
PE1 Point E1 is the market equilibrium
D1 point where D1=S1

QE1 # of Oranges
(millions)
 Equilibrium price is the price that equates quantity supplied
with quantity demanded
Equilibrium quantity is the quantity supplied and
demanded at the equilibrium price
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
E1
$3.00
2 18 10
3 15 15
$2.00
4 12 20
$1.00 5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
 Surplus (a.k.a. excess supply) when quantity supplied is
greater than quantity demanded (Qs>Qd)

P
$6.00 D Surplus S
$5.00
$4.00

$3.00
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
Shortage (a.k.a. excess demand) when quantity demanded
is greater than quantity supplied Qd>Qs)

P
$6.00 D S
$5.00
$4.00

$3.00
$2.00
$1.00
$0.00 Shortage Q
0 5 10 15 20 25 30 35
 Changes in Equilibrium

When the demand curve and/or the supply curve shifts, so

does the market equilibrium

Market of Books
P S1
S2
($/unit)
B
PE2 C
PE3 A
PE1 D2
D1

QE1QE2 QE3 # of books

(millions)
Three Steps to Analyzing Changes in Eqm

To determine the effects of any event,

1. Decide whether the event shifts Supply (S)
curve, Demand (D) curve, or both.
2. Decide in which direction curve shifts.

3. Use supplydemand diagram to see

how the shift changes eqm P and Q.
Summary of impact on S/D shifts on Q/P
 Numeric example of equilibrium

Demand is P 12
represented by: 10
Oil
Q=10-P
8 S
Supply by:
Q=P-2 6
What will be the D
4
equilibrium Price and
Quantity? 2

0
0 1 2 3 4 5 6 Q
 Evaluating the Market Equilibrium
P
60
Market eqm:
P = $30 50 S
Q = 15,000 40 CS
Total surplus
30
= CS + PS PS
Is the market eqm 20
efficient? 10
D
0 Q
0 5 10 15 20 25 30
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Which Buyers Consume the Good?

Every buyer P
whose WTP is 60
$30 will buy. S
50
Every buyer 40
whose WTP is
< $30 will not. 30

So, the buyers 20

who value the 10
good most highly D
are the ones who 0 Q
consume it. 0 5 10 15 20 25 30
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Which Sellers Produce the Good?

P
Every seller whose
60
cost is $30 will
produce the good. 50 S
Every seller whose 40
cost is > $30 will
not. 30
So, the sellers with 20
the lowest cost
produce the good. 10
D
0 Q
0 5 10 15 20 25 30
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Does Eqm Q Maximize PS and CS?

At Q = 20, P
cost of producing
60
the marginal unit
is $35 50 Waste
S
value to consumers 40
of the marginal unit
is only $20 30
Hence, we can 20
reduce the waste
by reducing Q. 10
D
This is true at any Q 0 Q
greater than 15. 0 5 10 15 20 25 30
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Does Eqm Q Maximize PS and CS?
At Q = 10, P
cost of producing 60
the marginal unit Waste
is $25 50 S
value to consumers 40
of the marginal unit
is $40 30
Hence, CS+ PS can 20
increase
10
by increasing Q. D
This is true at any Q 0 Q
less than 15. 0 5 10 15 20 25 30
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Does Eqm Q Maximize Total Surplus?

P
The market
60
eqm quantity
maximizes 50 S
total surplus:
40 CS
At any other 30
quantity, PS
can increase 20
total surplus by 10
moving toward D
the market eqm 0 Q
quantity. 0 5 10 15 20 25 30
2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.