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Wize University Microeconomics Textbook > Demand and Supply

Market Equilibrium

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Market Equilibrium

Market equilibrium is when the quantity supplied = quantity demanded for a product.


Equilibrium with Equations

Example 1
Suppose the demand function for textbooks is given by P = 80 - 2Q and the supply is P = 20 + 2Q. Find the equilibrium price and quantity.

Equilibrium quantity =
15

Equilibrium price =
$50


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Shortage and Surplus

When the price is below equilibrium there is excess
demand
which is also called a
shortage

Example 2

If the price is currently $30 and you are provided with the same equations as above, find the resulting shortage or surplus.



There is a
shortage
of
20
units

When the price is above equilibrium there is excess
supply
which is also called a
surplus


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Example 3
If the price is currently $70 and you are provided the same equations as above, find the resulting shortage or surplus.

There is a
surplus
of
20
units.


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Example: Equilibrium with a Table

Suppose you are provided the demand and supply schedules below.
1. What is the equilibrium (market clearing) price and quantity?

Equilibrium price =

$7

Equilibrium quantity =

70 units

2. If the price is currently $9, what would be the resulting shortage or surplus?

Surplus of 60 units

3. What would be the quantity traded at $9?

50 units

4. If the price is currently $6, what would be the resulting shortage or surplus?

Shortage of 30 units

5. If the price is currently $6, what would be the quantity traded (exchanged/sold)?

50 units
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Example: Drawing Graphs

What will happen to equilibrium price and quantity if the demand decreases and supply increases?


Diagram 1
Diagram 2
Diagram 3


Answer: Equilibrium price will decrease and change in equilibrium quantity is uncertain.

Diagram 1 shows that when demand decreases (shifts left), equilibrium price will decrease and quantity will decrease

Diagram 2 shows that when supply increases (shifts right), equilibrium price will decrease and quantity will increase

Diagram 3 shows both results on the same graphs. We can see that equilibrium price will definitely decrease, but the change in equilibrium quantity is uncertain because the supply shift is causing quantity to increase and demand shift is causing quantity to decrease. So it depends how much each line shifts. In diagram 3, the demand and supply shift by the same amount so the equilibrium quantity looks like it's staying the same but if one of the lines shifted more than the other, then quantity could increase or decrease.

Practice: Drawing Graphs

In the market for cellphones (normal goods), there is a technological advancement and at the same time consumers income rises. Which of the following will occur?




Practice: Graphs with One Good

The price will rise and the equilibrium quantity might increase, decrease, or stay the same when the:

Practice: Graphs with Two Different Goods

Goods A and B are complementary goods (in consumption). The cost of a resource used in the production of A decreases. As a result:

Practice: Equilibrium with Equations

The demand for burgers is given by Qd = 8000 - 7000P, where Qd is the quantity demanded and P is the price in dollars. The supply for burgers is given by Qs = 4000 + 1000P, where Qs is the quantity supplied and P is the price in dollars. Given these supply and demand relationships:
Extra Practice
Market supply is represented by Qs = 2P. Market demand is represented by Qd = 80 - 2P. What would result if the market price were $10?
Market demand is represented by the demand equation Qd = 300 - 2P. Similarly, market supply is given as Qs = 2P + 100. What would result if the market price were $15?
An improvement in the technology used in producing X, which is a substitute for good Y will
Metal is a resource used in the production of cars. Tires and cars are used together. What will occur in the market for tires when there is an increase in the price of metal
Suppose that in 2015 there were 400 cell phones sold at a price of $250 each. And in 2016 there were 450 cell phones sold at a price of $300 each. One possible explanation for this is that from 2015 to 2016 the ________ curve shifted to the _____
Equations
The demand for burgers is given by Qd = 8000 - 7000P, where Qd is the quantity demanded and P is the price in dollars. The supply for burgers is given by Qs = 4000 + 1000P, where Qs is the quantity supplied and P is the price in dollars. Given these supply and demand relationships:
Practice: Equilibrium 3
Goods A and B are complementary goods (in consumption). The cost of a resource used in the production of A decreases. As a result:
Drawing graphs
The price will rise and the equilibrium quantity might increase, decrease, or stay the same when the:
Drawing graphs
In the market for cellphones (normal goods), there is a technological advancement and at the same time consumers income rises.
Which of the following will occur?
When the expected future price increases, the
The chart represents the hourly wage and quantity of labour supply and demand for Ontario.
Market supply is represented by Qs = 2P. Market demand is represented by Qd = 80 - 2P. What would result if the market price were $10?
Market demand is represented by the demand equation Qd = 300 - 2P. Similarly, market supply is given as Qs = 2P + 100. What would result if the market price were $15?
Market supply is represented by Qs = 2P. Market demand is represented by Qd = 80 - 2P. What is the equilibrium price and quantity?
Answer in format: $Price, Quantity.
Practice: S&D/Equilibrium
The supply and demand curves for a good are shown below.
Practice: Demand and Supply
In the market for tomatoes, there is a drought and at the same time the population is growing. Which of the following will occur?
When there is a natural disaster, the
When the expected future price increases, the
In free and competitive markets, shortages are eliminated by