Mechanism of Equilibrium

Adjustments in Market Equilibrium

Lecture Notes

196
 Mechanism of Equilibrium

Demand and supply curves are models –simplified pictures- of how

buyers and sellers behave to a market. To show how they interact to
determine price and quantity produced and exchanged, economists
plot both carves on the same graph. The point at which the two carves
intersect is called the point of equilibrium in the market.

At the point of equilibrium in a market, the intentions of buyers

correspond exactly to the intentions of sellers: that is quantity that
buyers seek to purchase (the quantity demanded) is exactly equal to
the quantity that suppliers seek to sell (the quantity supplied). This
quantity is called the equilibrium quantity and the corresponding price
is called the equilibrium price.

197
 Equilibrium price is the price where quantity supplied equals
Note
quantity demanded.

Whenever the price is too high, the surplus will tend to force it
Note down. Whenever the price is too low, the shortage will tend to
force it up. As a result, the market tends to seek its own equilibrium.

A situation where quantity supplied is greater than

quantity demanded at a given price.

A situation where quantity supplied is less than quantity

demanded at a given price.

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 Price (CDs) 1 2 3 4 5
Quantity demanded 16 12 8 6 4
Quantity supplied 2 6 8 10 12
Surplus -- -- 0 4 8
Shortage 14 6 0 -- --
Table (10): Market Equilibrium

price S
D

Surplus
5
4
3

1
Shortage
0
2 4 6 8 10 12 14 16 Quantity

Figure (37): Market Equilibrium

199
Lecture Notes

200
 From the figure (37)and table (10), we note:

The market for CDs in equilibrium at a price $3 and a quantity of 8 units.

At that price, the quantity of CDs supplied equals the quantity of CDs
A demanded.
Equilibrium price = 3 dollars.
Equilibrium quantity = 8 units.

At the price $2, buyers would seek to purchase 12 CDs, while suppliers
would seek to sell only 6 CDs. The shortage of 6 CDs would prompt
B buyers to compete for the CDs available, bidding the price up.

At price $2, there is shortage by 6 units (push the price up).

201
 At the price $4, buyers would seek to purchase only 6 CDs, while
suppliers would seek to sell 10 CDs. The surplus of 4 CDs would induce
C sellers to hid the price down so that they could sell their excess CDs.

At price $4, there is surplus by 4 units(push the price down).

Something could come along to disturb the equilibrium, but then

Note new shortages, new surpluses, or both would appear to push the
price toward its new equilibrium level.

202
 Adjustments in Market Equilibrium

We can use the market equilibrium analysis to explain changes in

prices. A change in price is normally caused by a change in supply, a
change in demand, or changes in both.

Change in Supply

We have three Change in Demand

cases
Change in both Demand and Supply

203
Lecture Notes

204
 Change in Supply (Demand is constant)

When supply increases When supply decrease

When supply increases (supply curve shift When supply decreases (supply curve shift
to right) and demand remains constant, to lift) and demand remains constant,
equilibrium price decreases and equilibrium price increases and
equilibrium quantity increases. equilibrium quantity decreases.

price D S2 price D S2 S1
S1

P2

P1 P1

P2

0 0
Q1 Q2 Quantity Q2 Q1 Quantity
Figure (38): Increase supply Figure (39): decrease supply
Equilibrium Equilibrium
205
Lecture Notes

206
 Change in Demand (Supply is constant)

When demand increases When demand decrease

When demand increases (demand curve When demand decreases (demand curve
shift to right) and supply remains constant, shift to lift) and supply remains constant,
equilibrium price and quantity both equilibrium price and quantity both
increase. decrease.

price D2 S price D1 S
D1
D2

P2
P1
P1
P2

0 0
Q1 Q2 Quantity Q2 Q1 Quantity
Figure (40): Increase demand Figure (41): decrease demand
Equilibrium Equilibrium
207
 Change in both demand and Supply

When demand and supply increase or When demand or supply increases and
decrease the other decrease

The effect on equilibrium quantity is When demand decreases (demand curve

always known, but the effect on shift to lift) and supply remains constant,
equilibrium price depends on the equilibrium price and quantity both
relative magnitude of the changes decrease.

When demand and supply both When demand increases (shift right)
increase (shift right), equilibrium and supply decreases (shift lift),
quantity always increases. equilibrium price always increases.

When demand and supply both When demand decreases (shift lift)
decrease (shift left), equilibrium and supply increases (shift right),
quantity always decreases. equilibrium price always decreases.

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 D2
price D1 S price D1 D2 price D1 S1 S2
S1 S2 S1 D2
1 S2 1
2

P2
P1 P1 P1
1 1
P2 1

0 0 0
Q1 Q2 Quantity Q1 Q2 Quantity Q1 Q2 Quantity
12 12
Figure (42): Increase both demand and supply
D1 Equilibrium
S2 S1 price S2 price D2
price D1 S2 S1
D1 D2 1 S1
D2 1 1
2
P1

P2 P2 P1
1 1
P1 1

0 0 0
Q2 Q1 Quantity Q2 Q1 Quantity Q2 Q1 Quantity
12 12
Figure (43): decrease both demand and supply
Equilibrium
209
 D2 S2 S2 S2
price D1 S1 price D1 D2 S1 price D1 S1
2 D2
1 1
P2 P2 P2
1
P1 P1 P1
1 1 1

0 0 0
Q1 Q2 Quantity Quantity Q1 Quantity
Q2 Q1
12 12
Figure (44): Increase demand and decrease supply
D1 Equilibrium S1
price S1 price D2 S2
price S1 D1
D1 D2 1 S2
D2 S2 1
2
1
P1 P1
1
P2 P1
1
P1 1
P2
1
0 0 0
Q2 Q1 Quantity Q2 Q1 Quantity Q2 Q1 Quantity
12 12
Figure (45): decrease demand and increase supply
Equilibrium
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