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Market |
Interaction of buyers and sellers |
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Equilibrium |
only one price and quantity combination is compatible with the intentions of both buyers and sellers. Market price Intersection of supply and demand curves Quantity buyers will buy = quantity sellers will sell |
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When a market is in equilibrium |
A market is in equilibrium when price adjusts so that quantity demanded equals quantity supplied. |
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Cause |
Markets reach equilibrium because buyers have a demand behavior (raise price, buy less, and vice versa) and sellers have a supply behavior (raise price, supply more, and vice versa). |
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No one is in charge |
Adam Smith’s invisible hand leads the market to equilibrium |
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At equilibrium |
Quantity demanded = quantity supplied at the equilibrium price |
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Equilibrium |
a situation in which opposing forces balance each other. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. |
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equilibrium price |
the price at which the quantity demanded equals the quantity supplied. |
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equilibrium quantity |
is the quantity bought and sold at the equilibrium price. Price regulates buying and selling plans. Price adjusts when plans don’t match. |
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Surplus |
A market is in equilibrium when price adjusts so that quantity demanded equals quantity supplied. If price is greater than equilibrium level, there will be a surplus, which forces price down. |
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Shortage |
A market is in equilibrium when price adjusts so that quantity demanded equals quantity supplied. If price is less than equilibrium level. there will be a shortage. which forces price up. |
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Market surplus |
excess supply |
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Market shortage |
excess demand |
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Market equilibrium |
demand = supply no shortage, no surplus, price wont change until there is a shift in demand or in supply. |
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Price as a Regulator |
Figure illustrates the equilibrium price and equilibrium quantity in the market for CD-Rs. If the price of a disc is $2, the quantity supplied exceeds the quantity demanded and there is a surplus of discs. |
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Quantity supply > quantity demanded |
surplus |
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Quantity supply < quantity demanded |
shortage |
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Price Adjustments |
At prices above the equilibrium, a surplus forces the price down. At prices below the equilibrium, a shortage forces the price up. At the equilibrium price, buying plans selling plans agree and the price doesn’t change. |
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Market surplus |
: the amount by which quantity supplied (Qs) exceeds quantity demanded (Qd) at a given price; excess supply. Price is too high. Qs > Qd, a surplus. Buyer and seller behaviors kick in. Price will fall to equilibrium price, Pe. |
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Market shortage |
The amount by which quantity demanded (Qd) exceeds quantity supplied (Qs) at a given price; excess demand. Price is too low. Qs < Qd, a shortage. Buyer and seller behaviors kick in. Price will rise to equilibrium price, Pe. |
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disequilibrium |
When prices change A shift in either demand or supply causes the price to change but A price change does NOT cause … the demand curve to shift or … the supply curve to shift. |
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