INTRODUCTION TO ECONOMICS AND THE ECONOMY:

MARKET EQUILIBRIUM

THE MARKET: SUPPLY AND DEMAND WORKING TOGETHER

The auctioneer calls out different prices, and buyers

record how much they are willing and able to buy. At
prices of $9.00, $8.00, and $7.00, quantity supplied is
greater than quantity demanded. At prices of $4.25 and
$5.25, quantity demanded is greater than quantity
supplied. At a price of $6.10, quantity demanded
equals quantity supplied.

THE LANGUAGE OF SUPPLY AND DEMAND

Surplus (Excess Supply) – A condition in which the quantity supplied is greater than the quantity
demanded. Surpluses occur only at prices above equilibrium price.
Shortage (Excess Demand) – A condition in which the quantity demanded is greater than the quantity
supplied. Shortages occur only at prices below equilibrium price.
Equilibrium Price (Market-Clearing Price) – The price at which the quantity demanded of the good
equals the quantity supplied.
Equilibrium Quantity – The quantity that corresponds to equilibrium price. The quantity at which the
amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and
able to sell, and both equal the amount actually bought and sold.
Disequilibrium Price – A price other than equilibrium price. A price at which the quantity demanded does
not equal the quantity supplied.
Disequilibrium – A state of either surplus or shortage in a market.
Equilibrium – Equilibrium means “at rest.” Equilibrium in a market is the price–quantity combination from
which buyers or sellers do not tend to move away. Graphically, equilibrium is the intersection point of the
supply and demand curves.
MOVING TO EQUILIBRIUM: WHAT HAPPENS TO PRICE WHEN THERE IS A SURPLUS OR
A SHORTAGE?

WHY DOES PRICE FALL WHEN THERE IS A SURPLUS?

From the exhibit on the right, there is a surplus at a price
of $15: The quantity supplied (150 units) is greater than
the quantity demanded (50 units). Suppliers will not be
able to sell all they had hoped to sell at $15. As a result,
their inventories will grow beyond the level they hold in
preparation for demand changes. Sellers will want to
reduce their inventories. Some will lower prices to do so,
some will cut back on production, others will do a little of
both. As shown in the exhibit, price and output tend to fall
until equilibrium is achieved

WHY DOES PRICE RISE WHEN THERE IS A

SHORTAGE? From the same exhibit, there is a shortage
at a price of $5: The quantity demanded (150 units) is
greater than the quantity supplied (50 units). Buyers will
not be able to buy all they had hoped to buy at $5. Some
buyers will bid up the price to get sellers to sell to them
instead of to other buyers. Some sellers, seeing buyers
clamor for the goods, will realize that they can raise the
price of the goods they have for sale. Higher prices will
also call forth added output. Thus, price and output tend to
rise until equilibrium is achieved.

Moving to Equilibrium
If there is a surplus, sellers’ inventories rise above the level they hold in preparation for demand changes.
Sellers will want to reduce their inventories. As a result, price and output fall until equilibrium is achieved.
If there is a shortage, some buyers will bid up price to get sellers to sell to them instead of to other buyers.
Some sellers will realize they can raise the price of the goods they have for sale. Higher prices will call forth
added output. Price and output rise until equilibrium is achieved.

If a surplus exists, lower the price; if a shortage exists, raise the price.
WHAT CAN CHANGE EQUILIBRIUM PRICE AND QUANTITY?
Equilibrium price and quantity are determined by supply and demand. Whenever demand changes, supply
changes, or both change, equilibrium price and quantity change.

Case No. 1: demand rises; supply is constant Case No. 2: demand falls; supply is constant

Case No. 3: supply rises; demand is constant Case No. 4: supply falls; demand is constant
Case No. 5: demand rises and supply falls by Case No. 6: demand falls and supply rises
an equal amount by an equal amount

Case No. 7: demand rises by a greater Case No. 8: demand rises by a smaller
amount than supply falls amount than supply falls