2.

6 PRICE, QUANTITY, AND

MARKET EQUILIBRIUM

Learning Objectives
LO1 Understand how markets reach equilibrium.
LO2 Understand why market exchange is voluntary.
Key Terms

• market equilibrium
• surplus
• shortage
Market Equilibrium

• When the quantity that consumers are willing and able to

buy equals the quantity that producers are willing and able
to sell, that market reaches market equilibrium.
Equilibrium in the Pizza Market

Figure 2.15A

Price per Quantity Quantity Surplus or Effect on

Pizza Demanded Supplied Shortage Price
$15 8 28 Surplus of 20 Falls
12 14 24 Surplus of 10 Falls
9 20 20 Equilibrium Remains the same
6 26 16 Shortage of 10 Rises
3 32 12 Shortage of 20 Rises
Equilibrium in the Pizza Market
Figure 2.15B
Price per Quantity Quantity Surplus Value of Effect on
piece of Demanded Supplied or surplus Price
siomai Shortage or
shortage
P14 5 25
P12 10 20
P10 15 15
P8 20 10
P6 25 5

6
© 2013 Cengage Learning. All Rights Reserved. CHAPTER 4
Surplus Forces the Price Down

• At a given price, the amount by which quantity supplied

exceeds quantity demanded is called the surplus.
• As long as quantity supplied exceeds quantity demanded,
the surplus forces the price lower.
Shortage Forces the Price Up

• At a given price, the amount by which quantity demanded

exceeds quantity supplied is called the shortage.
• As long as quantity demanded and quantity supplied differ,
this difference forces a price change.
The Market Mechanism

A Surplus

• The market price is above equilibrium

– There is excess supply
– Producers lower prices so that quantity
demanded increases and quantity supplied
decreases
– The market continues to adjust until the
equilibrium price is reached.
The Market Mechanism

Price
S
($ per unit)
Surplus
P1
Assume the price is P1 , then:
1) Qs : Q2 > Qd : Q1
2) Excess supply is Q1:Q2.
P2 3) Producers lower price.
4) Quantity supplied decreases
and quantity demanded
increases.
5) Equilibrium at P2 and Q3

Q1 Q3 Q2 Quantity
The Market Mechanism

Shortage

• The market price is below equilibrium:

– There is a shortage
– Producers raise price so that quantity
demanded decreases and quantity supplied
increases
– The market continues to adjust until the new
equilibrium price is reached.
The Market Mechanism

Price
($ per unit) S

Assume the price is P2 , then:

1) Qd : Q2 > Qs : Q1
2) Shortage is Q1:Q2.
P3 3) Producers raise price.
4) Quantity supplied increases
and quantity demanded
decreases.
P2 5) Equilibrium at P3, Q3

Shortage
D

Q1 Q3 Q2 Quantity
 13
© 2013 Cengage Learning. All Rights Reserved. CHAPTER 4
Market Forces Lead to Equilibrium Price and
Quantity
• The equilibrium price, or market-clearing price, equates
quantity demanded with quantity supplied.
• Because there is no shortage and no surplus, there is no
longer any pressure for the price to change.

NOTE: A MARKET FINDS EQUILIBRIUM THROUGH THE

INDEPENDENT AND VOLUNTARY ACTIONS OF BUYERS AND
SELLERS
Adam Smith’s Invisible Hand

• Although each individual pursues his or her own self-

interest, the “invisible hand” of market competition
promotes the general welfare.
Market Exchange Is Voluntary

• Neither buyers nor sellers would participate in the market

unless they expected to be better off.
• Prices help people recognize market opportunities to make
better choices as consumers and as producers.
2.7 SHIFTS OF DEMAND
AND SUPPLY CURVES

Learning Objectives
LO1 Explain how a shift of the demand curve affects
equilibrium price and quantity.
LO2 Explain how a shift of the supply curve affects equilibrium
price and quantity.
Key Terms

• increase in demand
• decrease in demand
• increase in supply
• decrease in supply
Shifts of the Demand Curve

• A shift of the demand curve means that quantity

demanded changes at each price.
Changes That Can
Shift the Demand Curve
• Changes in consumer income
• Changes in the prices of related goods
• Changes in the size or composition of the population
• Changes in consumer expectations
• Changes in consumer tastes
What Could Shift the Demand Curve?

• An increase in the money income of consumers

• An increase in the price of a substitute
• A change in expectations
• A growth in the number of consumers
• A change in consumer tastes
An Increase in Demand

• An increase in demand means that consumers are more

willing and able to buy the product at each price.
Effects of an Increase in Demand
Figure 2.16
A Decrease in Demand

• A decrease in demand means that consumers are less

willing and able to buy the product at every price.
Effects of a Decrease in Demand
Figure 2.17
Summary of Demand Shifts

• If the demand curve shifts rightward, price and quantity

increase.
• If the demand curve shifts leftward, price and quantity
decrease.
Shifts of the Supply Curve

• A shift of the supply curve means that quantity supplied

changes at each price.
Determinants of Supply

• Five determinants of market supply

(other than price)
• Cost of resources used to make the good
• Price of other goods these resources could make
• Technology used to make the good
• Producer expectations
• Number of sellers in the market
What Could Shift the Supply Curve?

• A reduction in the price of a resource

• A decline in the price of another good these resources
could make
• A technological breakthrough
• A change in expectations
• An increase in the number of producers
An Increase in Supply

• An increase in supply means that producers are more

willing and able to sell more the product at each price.
Effects of an Increase in Supply
Figure 2.18
A Decrease in Supply

• A decrease in supply means that producers are willing and

able to sell less of the product at each price.
Effects of a Decrease in Supply
Figure 2.19
Summary of Supply Shifts

• If the supply curve shifts rightward, price decreases but

quantity increases.
• If supply shifts leftward, price increases but quantity
decreases.
SEATWORK

Suppose that running becomes more popular. As a

result, consumers are willing and able to purchase 30
thousand more pairs of running shoes at each possible
price. The demand and supply schedules to the right
show increase in demand. Draw a graph showing this
shift of demand and the unchanged supply for running
shoes. What is the new equilibrium price? Explain why
the equilibrium price changed from P500.
35
© 2013 Cengage Learning. All Rights Reserved. CHAPTER 4
 Price QUANTITY QUANTITY
(pesos) DEMANDED SUPPLIED
OLD NEW
P700 40 70 100
600 50 80 80
500 60 90 60
400 70 100 40
300 80 110 20

36
© 2013 Cengage Learning. All Rights Reserved. CHAPTER 4