Equilibrium

Econ 212: Intermediate Microeconomics

John S. Schuler
November 16, 2019

1 Equilibrium
We call the point where the supply and demand curves cross the equilibrium or market-clearing point. This is
the price and quantity at which the quantity supplied equals the quantity demanded. At a price higher than
the equilibrium price, there will be a surplus. The quantity supplied will exceed the quantity demanded at
that price. At a price below the equilibrium price, the quantity demanded will be greater than the quantity
supplied. The result will be a shortage. More people will want to buy the good at that price than can buy
it. When a market is equilibrium, we have what is called a zero-arbitrage condition. This means that it
is not possible to make money by buying low and selling high. Thus, the law of one price holds in equilibrium.

P
S

(4, 5)
P∗

Q∗ Q

1
2 Producer and Consumer Surplus
Recall our discussion of producer surplus. A producer can often sell a quantity of goods for a price above
the minimum price for which they would produce this quantity. This difference multiplied by the quantity
produced is called the producer surplus at that price. Similarly, sometimes a consumer is able to buy a
quantity of goods at a price below the minimum price they would have paid for that quantity. This differ-
ence multiplied by the quantity consumed is the consumer surplus at that price. If we add up the producer
and consumer surpluses at various prices added together are represented by the pink and blue areas on the
curve respectively. Note that the line at the equilibrium price separates the two. Also, notice that at the
equilibrium price, the consumer and producer surplus are both zero.

P
S

(4, 5)
P∗

Q∗ Q

3 Shifts in Supply and Demand

As we saw before, supply and demand can shift right and left. This changes the equilibrium price. Suppose
supply shifts out. This lowers the equilibrium price and increases the equilibrium quantity.

2
 P
S1

D S2

(4, 5)
P1

(6, 4)
P2

Q1 Q2 Q
Now, what happens if demand shifts right? This again raises the equilibrium quantity but it also raises the
equilibrium price. In general, a rightward shift in either supply or demand will raise the equilibrium quantity.
If it is a shift in demand, the equilibrium price will increase. If it is a shift in supply, the equilibrium price
will decrease. Similarly, a leftward shift in either supply or demand will decrease the quantity supplied. If it
is demand that shifts left, the equilibrium price will decrease. If it is supply the shifts left, the equilibrium
price will increase. If you are ever uncertain, simply draw a diagram.

3
 D2

P
S
P2
D1

(4, 5)
P1

Q1 Q2 Q
Of course, it is possible or both supply and demand to shift. In this case, it is not possible in general to say
what will happen to the price and quantity. Consider the graph below. Both supply and demand shifted
right. The price went up somewhat. Obviously, different curves or different shifts could have produced
different changes in price and quantity. Notice that if both curves shift right, we know that quantity will
increase but we do not know what will happen to price. Similarly, if both curves shift left, we know that
quantity will decrease. Again, we do not know what will happen to price.

4
 D2

S1 S2

D1
(8, 6)
P2

(4, 5)
P1

Q1 Q2