MARKET

EQUILIBRIUM
MARKET EQUILIBRIUM
A situation where for a particular
good supply = demand. When the
market is in equilibrium, there is no
tendency for prices to change. We
say the market-clearing price has
been achieved
SURPLUS VS. SHORTAGE
Surplus refers to the amount of a
resource that exceeds the amount
that is actively utilized. On the
other hand, shortage refers to a
condition whereby there is an
excess demand of products in
comparison to the quantity
supplied in the market
MARKET EQUILIBRIUM

In the diagram,
the equilibrium
price is P1. The
equilibrium
quantity is Q1.
SHORTAGE
In the diagram, price (P2) is below the
equilibrium. At this price, demand would
be greater than the supply. Therefore
there is a shortage of (Q2 – Q1)
If there is a shortage, firms will put up
prices and supply more. As price rises,
there will be a movement along the
demand curve and less will be
demanded.
Therefore the price will rise to P1 until
there is no shortage and supply =
demand.
SURPLUS
If price was at P2, this is above the
equilibrium of P1. At the price of P2,
then supply (Q2) would be greater
than demand (Q1) and therefore there
is too much supply. There is a surplus.
(Q2-Q1)
Therefore firms would reduce price
and supply less. This would encourage
more demand and therefore the
surplus will be eliminated. The new
market equilibrium will be at Q3 and
P1.
SEAT WORK:
Given the supply and demand functions for good A: QD = 35 −
5P and QS = −10 + 10P.

a. Calculate equilibrium price and quantity.

b. On a graph, plot the supply and demand curves and the
equilibrium price and quantity.
c. Create a table that shows the market equilibrium price
PRICE ELASTICITY
OF
DEMAND & SUPPLY
ELASTICITY
In business and economics, price
elasticity refers to the degree to
which individuals, consumers, or
producers change their demand
or the amount supplied in
response to price or income
changes.
ELASTICITY
Elasticity refers to the measure of the
responsiveness of quantity demanded or
quantity supplied to one of its determinants.
Goods that are elastic see their demand
respond rapidly to changes in factors like price
or supply. Inelastic goods, on the other hand,
retain their demand even when prices rise
sharply (e.g., gasoline or food).
PRICE ELASTICITY
measures the responsiveness of the
quantity demanded or supplied of a
good to a change in its price. It is
computed as the percentage
change in quantity demanded—or
supplied—divided by the percentage
change in price.
PRICE ELASTICITY
Elasticity can be described as elastic
—or very responsive—unit elastic, or
inelastic—not very responsive.
Elastic demand or supply curves
indicate that the quantity
demanded or supplied responds to
price changes in a greater than
proportional manner.
PRICE ELASTICITY OF DEMAND AND SUPPLY
Elastic demand or supply curves indicate that the quantity
demanded or supplied responds to price changes in a
greater than proportional manner.
An inelastic demand or supply curve is one where a given
percentage change in price will cause a smaller
percentage change in quantity demanded or supplied.
Unitary elasticity means that a given percentage change in
price leads to an equal percentage change in quantity
demanded or supplied.
HOW ELASTICITY WORK
For example, insulin is a product that
is highly inelastic. For people with
diabetes who need insulin, the
demand is so great that price
increases have very little effect on the
quantity demanded. Price decreases
also do not affect the quantity
demanded; most of those who need
insulin aren't holding out for a lower
price and are already making
purchases.
HOW ELASTICITY WORK
On the other side of the equation are
highly elastic products. Spa days, for
example, are highly elastic in that they
aren't a necessary good, and an
increase in the price of trips to the
spa will lead to a greater proportion
decline in the demand for such
services. Conversely, a decrease in
the price will lead to a greater than
proportional increase in demand for
spa treatments.
PRICE ELASTICITY
PRICE ELASTICITY
PRICE
ELASTICITY
SELF-CHECK QUESTIONS
Using the data shown in the table
below about demand for smart
phones, calculate the price
elasticity of demand from point B
to C, D to E, and G to H.
Classify the elasticity at each
point as elastic, inelastic, or unit
elastic.
SELF-CHECK QUESTIONS
Using the data shown in in
the table below about supply
of alarm clocks, calculate the
price elasticity of supply
from: point J to K, L to M, and
N to P.
Classify the elasticity at each
point as elastic, inelastic, or
unit elastic.
PERFORMANCE TASK: CRITICAL-THINKING QUESTION

Transatlantic air travel in business class has an

estimated elasticity of demand of 0.40 less
than transatlantic air travel in economy class,
which has an estimated price elasticity of 0.62.
Why do you think this is the case?

To be submitted next meeting.

1/4 sheet of paper.