Equilibrium Price, Equilibrium Equilibrium Price, Equilibrium Quantity and the Interrelation of Quantity and the Interrelation of

MarketsMarkets

Take-Away for the next few daysTake-Away for the next few days

The forces of supply and demand work to The forces of supply and demand work to establish a price at which the quantity of goods establish a price at which the quantity of goods and services people will buy is equal to the and services people will buy is equal to the quantity suppliers will provide.quantity suppliers will provide.

If supply or demand changes, equilibrium price If supply or demand changes, equilibrium price and quantity change.and quantity change.

Finally, the equilibrium price and quantity of a Finally, the equilibrium price and quantity of a good or service established by supply and good or service established by supply and demand affect the equilibrium price and quantity demand affect the equilibrium price and quantity in other markets. Market prices determine what in other markets. Market prices determine what to produce, how to produce and whom to produce to produce, how to produce and whom to produce it for.it for.

Equilibrium- State of balance between opposing forces. It Equilibrium- State of balance between opposing forces. It occurs because elsewhere there is a state of imbalance or occurs because elsewhere there is a state of imbalance or

disequilibriumdisequilibrium. .

PricePrice

(per (per DVD)DVD)

QQSS QQDD

Surplus(+)Surplus(+)

Shortage Shortage (-)(-)

$3.50$3.50 77 33 +4+4

$2.50$2.50 55 55 00

$1.50$1.50 33 77 -4-4P

rice

per

DV

D

$5.00

4.00

3.50

3.00

2.50

2.00

1.50

1.00

S

D

Quantity of DVDs supplied and demanded (per week)

Excess demand

1 2 3 4 5 6

Excess supply

E

7 8

Shifts in Demand and SupplyShifts in Demand and Supply

A. Increase in DemandA. Increase in Demand– D- increaseD- increase– P- increaseP- increase– Quantity supplied- increaseQuantity supplied- increase

B. Decrease in DemandB. Decrease in Demand– D- decreaseD- decrease– P- decreaseP- decrease– Quantity supplied- decreaseQuantity supplied- decrease

C. Increase in SupplyC. Increase in Supply– S- increaseS- increase– P- decreaseP- decrease– Quantity demanded- increaseQuantity demanded- increase

D. Decrease in SupplyD. Decrease in Supply– S- decreaseS- decrease– P- increaseP- increase– Quantity demanded- decreaseQuantity demanded- decrease

Increase in DemandIncrease in DemandP

rice

(p

er D

VD

s)

A

S0

Quantity of DVDs (per week)

$2.50

2.25

0 98 10

D0 D1

B Excess demand

C

B Excess demandA

Pri

ce (

per

DV

Ds)

Quantity of DVDs (per week)

$2.50

2.25

0 98 10

D0

S0C

S1

Decrease in SupplyDecrease in Supply