Market Equilibrium

Hansani Liyanage
Lecturer In Business
M.A in Economics and Statistics (University of
Peradeniya),
B.A in Economics (UoP),
PQ Human Resources Management (IPM),
PgDip in Marketing (SLIM)
Lecture Overview:

- Market equilibrium

Weeks 1 & 2
Market
Equilibrium
 Market Equilibrium
What is a market?

Any convent set of arraignments or organization in which buyers and

sellers exchange their goods and services.
Market Equilibrium

Market equilibrium: A situation in which quantity demanded equals

quantity supplied

quantity demanded quantity supplied

 Market Equilibrium
Market equilibrium: A situation in which quantity demanded equals
quantity supplied

Quantity Demanded
=
Quantity Supplied
 Market Equilibrium

Equilibrium price:
The price at which the quantity demanded equals the quantity supplied.

At P* = DEMAND

At P* = SUPPLY
Market Equilibrium

Equilibrium quantity: The quantity where quantity demanded

equals the quantity supplied.

At Q* = DEMAND

At Q* = SUPPLY
 Market equilibrium: Figure 3.7
Price (dollars
per tablet)
Supply

$500 Market equilibrium

Equilibrium
price

Equilibrium
quantity Demand
0 5 Quantity (millions of
tablets per month)
Weeks 1 & 2
 Shortage

 Shortage below Ep: At prices below Ep, D>S and consumers

faced with a shortage outbid each other. As price increases, D
decreases, S increases until D+S are equal at the Ep.
At prices below Equl. Price (Maximum
Price),
Shortage
= Scarcity Demand>Supply

15 Consumers faced with a shortage

Ep
10
As price increases,
Demand decreases,
10 20 50 Supply Increases,
Until D = S are equal at the Ep.
 Surplus

 Surplus above Ep: At prices above Ep, S>D and producers

faced with unsold stocks reduce prices. As price fall, D
increases, S decreases until D+S are equal at the Ep.

At prices above Equl. Price (Minimum

Price),
Surplus =
Excess Supply > Demand
15

Ep 10 Producers faced with unsold stocks

As price falls,
Demand increases,
Supply decreases,
10 20 50 Until D = S are equal at the Ep.
 The effect of surpluses and shortages on the market
Price (dollars Surplus of 2 million
per tablet) tablets resulting from
price above Supply
equilibrium.

$600

500 Shortage of 4 million

tablets resulting from
price below
equilibrium.
300

Demand

0 3 4 5 6 7 Quantity (millions of
tablets per month)
Weeks 1 & 2
 The effect of an
increase in supply
on equilibrium
 The effect of an increase in supply on equilibrium

Price (dollars
per tablet) Supply1
Supply2

1. As Toshiba enters the

market for tablet
computers, the supply
P1 curve shifts to the right …
P2
3. …and increasing the
2. …decreasing equilibrium quantity.
the equilibrium
price…
Demand
0 Q1 Q2 Quantity (millions of
tablets per month)
Weeks 1 & 2
 The effect of an increase in demand on equilibrium

Price (dollars 1. As population and

per tablet) income grow, the
demand curve shifts to
the right …
Supply

P2 3. …and also
P1 increasing the
equilibrium quantity.

2. …increasing
the equilibrium
price… Demand2
Demand1
0 Q1 Quantity (millions of
Q2
tablets per month)
Weeks 1 & 2
Note: when two variables change one outcome will be “indeterminate “
 E.g. both demand and supply increase:

P D1 D2 S1
S2 Equilibrium
quantity rises and
price rises
P2 are uncertain

D2
S1 D1
S2
0 Q1 Q2 Q

Weeks 1 & 2
The End!!!