Market Equilibrium

Interaction of buyers and sellers

only one price and quantity combination is compatible with the intentions of both buyers and sellers. Market price Intersection of supply and demand curves Quantity buyers will buy = quantity sellers will sell

A market is in equilibrium when price adjusts so that quantity demanded equals quantity supplied.

Markets reach equilibrium because buyers have a demand behavior (raise price, buy less, and vice versa) and sellers have a supply behavior (raise price, supply more, and vice versa).

Adam Smith's invisible hand leads the market to equilibrium

Quantity demanded = quantity supplied at the equilibrium price

a situation in which opposing forces balance each other. Equilibrium in a market occurs when the price balances the plans of buyers and sellers.

the price at which the quantity demanded equals the quantity supplied.

is the quantity bought and sold at the equilibrium price. Price regulates buying and selling plans. Price adjusts when plans don't match.

A market is in equilibrium when price adjusts so that quantity demanded equals quantity supplied. If price is greater than equilibrium level, there will be a surplus, which forces price down.

A market is in equilibrium when price adjusts so that quantity demanded equals quantity supplied. If price is less than equilibrium level. there will be a shortage. which forces price up.

excess supply

excess demand

demand = supply no shortage, no surplus, price wont change until there is a shift in demand or in supply.

Figure illustrates the equilibrium price and equilibrium quantity in the market for CD-Rs. If the price of a disc is $2, the quantity supplied exceeds the quantity demanded and there is a surplus of discs.

surplus

shortage

At prices above the equilibrium, a surplus forces the price down. At prices below the equilibrium, a shortage forces the price up. At the equilibrium price, buying plans selling plans agree and the price doesn't change.

: the amount by which quantity supplied (Qs) exceeds quantity demanded (Qd) at a given price; excess supply. Price is too high. Qs > Qd, a surplus. Buyer and seller behaviors kick in. Price will fall to equilibrium price, Pe.

The amount by which quantity demanded (Qd) exceeds quantity supplied (Qs) at a given price; excess demand. Price is too low. Qs < Qd, a shortage. Buyer and seller behaviors kick in. Price will rise to equilibrium price, Pe.

When prices change A shift in either demand or supply causes the price to change but A price change does NOT cause ... the demand curve to shift or ... the supply curve to shift.