LESSON 3

Market Equilibrium

Learning Outcomes
At the end of the lesson, the students will be able to:
a. Understand the principle of Market Equilibrium;
b. Define surplus and shortage; and
c. Perform graphical interpretation of Market Equilibrium.

Introduction
We have considered demand and supply separately. We have seen how
consumers demand the amount or quantity of goods and services at each
corresponding price. Similarly, producers are willing and able to supply the amount or
quantity of goods and services at each price. Hence, the law of demand and supply
stipulate that when demand is greater than supply, price increases; and when supply is
greater than demand, price decreases. And when demand is equal to supply, price
remains constant. It is now the right time to discuss what will happen when supply and
demand intersect.

Activity
Instruction. Describe each picture.
Palit mi’g manga.

1.
2.

_______________________________________________________________________
_______________________________________________________________________
___________________________________.
 Palit mi’g manga.
2.

_______________________________________________________________________
_______________________________________________________________________
_______________________.

3. Palit mi’g manga.

_____________________________________________________________
_____________________________________________________________
______________________________.

Analysis
1. Base from the activity, what will happen to the price of mango in Picture 1?
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
2. Base from the activity, what will happen to the price of mango in picture 2 ?
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________

Abstraction/Discussion

Market Equilibrium
A Condition of equilibrium is reached when the quantity of supply and
demand are balanced or equal at a given price level. This means that at one
particular price, the buyers are able to purchase the quantity they are willing to buy and
sellers are also able to sell the quantity they are willing to sell. When a market reaches
to equilibrium, no changes in the market price will take place. In other words, the price
is stable under the existing market conditions. In economics, there are three ways to
illustrate the equilibrium condition; Schedule Approach; Graphical Approach; and
Algebraic Equations. In this lesson, we will touch only the schedule and graphical
approach.

Getting the Equilibrium Condition via the Schedule Approach

Using schedule approach, the equilibrium condition may be illustrated by
combining the demand and supply schedules. If we merge the demand and supply
schedules given in the previous discussion, we will observe from the combined table
below a common point, C, where price and quantity for both supply and demand are
equal. Hence, equilibrium price for bread is Php2.00. At Php2.00, consumers will be
able to purchase the number of bread they want to buy and the sellers will be able to
sell the number of bread they are only willing to sell.

Demand and Supply Schedule for Bread

Point Price in Php Quantity Demanded Quantity Supplied
A 4 0 40
B 3 10 30
C 2 20 20
D 1 30 10
E 0 40 0
The Graphical Approach
In the same way, combining the demand and supply curves from the previous
discussion, we will arrive at the figure below where point C is the equilibrium point of
both the demand and supply curves.

Price Market Equilibrium

4
3
C Equilibrium Point
2
1

10 20 30 40 Quantity

Surplus and Shortage

In a competitive market, surplus or shortage may occur when there are
movements or changes within the same supply and demand schedule. Remember that
aside from the price, there are also other determinants that may cause the demand or
supply curve to shift. A surplus is experienced when the price of good is above the
equilibrium point. Surplus above the point of equilibrium means that at a price more
than the equilibrium price, the quantity supplied of a good in the market exceeds its
quantity demanded.
On the other hand, shortage occurs when the quantity demanded exceeds the
quantity being supplied. In other words, there are demands for the commodity that are
not being met. This happens when the price is below its equilibrium level. When
shortage exists in the market, the consumers cannot buy as much of the goods as they
would like.
To understand further, let us use the example where price is equal to 3 or P=3
as seen in the graph below. The quantity supplied at P=3 is 30 and the quantity
demanded is 10.
 Thus, Qs= 30 and Qd= 10 at P=3. A condition of surplus exists because Qs is
greater than Qd. If we subtract Qd from Qs, the amount of surplus is equal to 20 or
(Qs-Qd=20).
At P= 1, Qd is equal to 30 and Qs is equal to 10. Since Qd is greater than Qs a
condition of shortage is experienced. The amount of shortage is equal to 20
(Qd-Qs=20)
Hence, if Qs>Qd, there is Surplus and if Qd>Qs, there is shortage in the market.

Price
Surplus
4
-- --------
3
----------------- C Equilibrium Point
--------
-------
------ 2
-------------
-- --------
1
------
--- -------- -
- -
10 20 30 40 Quantity

Shortage

Application
Task 1: Using your supply and demand schedule in previous task (Lesson 2), identify
the equilibrium point by applying the graphical Approach.
Task 2: Using your graphical approach in task 1, identify the area of Surplus and
Shortage. Below the graph must be your simplified explanation.

Closure
Great job students, we are done discussing the basic concept of demand and
supply, next topic would be the Elasticity of demand and supply. Pls do more further
readings, thanks and stay safe.