Market Equilibrium Understanding Market Equilibrium Prices that consumers

Market Equilibrium

Understanding Market Equilibrium Prices that consumers pay and sellers receive are determined by the interaction of demand supply. Market Equilibrium: the interaction of demand supply curves Compromise between consumers who want the lowest prices possible and sellers who want the highest prices possible

Equilibrium point: quantity demanded = quantity supplied Equilibrium quantity: amount of a good that is bought and sold in a market that is in equilibrium Equilibrium price: price at which a good is bought and sold in a market that is in equilibrium

Surplus Quantity supplied is greater than quantity demanded (Qs > Qd) Occur only at prices above the equilibrium price Excess supply → prices ↓ because suppliers hope to sell their inventory Consumer buy more Continues until Qs=Qd (Equilibrium)

Shortages Quantity demanded is greater than quantity supplied (Qd > Qs) Occur only at prices below equilibrium price Excess demand → prices ↑ because buyers will offer to pay a higher price to get sellers to sell to them Sellers/Producers ↑ prices → consumers buy less Continues until Qs=Qd (equilibrium)

Market Equilibrium Market Demand Supply Curves for Strawberries Market Demand Supply Schedules for Strawberries Quantities (millions of kg) D S 3. 00 5 13 +8 2. 50 7 11 +4 2. 00 9 9 0 1. 50 11 7 -4 1. 00 13 5 -8 2. 50 Price ($ per kg) Surplus (+) or Shortage (-) (millions of kg) 3. 00 Surplus b 1. 00 b e 2. 00 1. 50 S a a Shortage D 0 9 11 13 15 1 3 5 7 Quantity demanded or supplied (millions of kg per year)

Market Equilibrium: Changes in Demand Supply

Changes in Demand Increase in Demand: Shift of the demand curve to the right Pushes up both equilibrium price and quantity Creates a shortage Decrease in Demand: Shift of the demand curve to the left Pushes down both equilibrium price and quantity Creates a surplus

Demand Changes and Equilibrium Market Demand Supply Curves for Strawberries S 3. 00 Price 2. 50 ($ per kg. ) Quantities (D 0) (D 1) (S) (millions of kg) 3. 00 5 9 13 2. 50 7 11 11 2. 00 9 13 9 1. 50 11 15 7 1. 00 13 17 5 Price ($ per kg) Market Demand Supply Schedules for Strawberries b a 2. 00 1. 50 shortage 1. 00 0 D 0 1 3 5 7 9 11 13 15 Quantity (millions of kg per year) D 1 17

Changes in Supply Increase in Supply: Shift of the supply curve to the right Pushes equilibrium price down and equilibrium quantity up Creates a surplus Decrease in Supply: Shift of the demand curve to the left Pushes equilibrium price up and equilibrium quantity down Creates a shortage

Supply Changes and Equilibrium Market Demand Supply Curves for Strawberries 3. 00 Price 2. 50 ($ per kg) Quantities (D 0) (S 1) (millions of kg) 3. 00 5 13 17 2. 50 7 11 15 2. 00 9 9 13 1. 50 11 7 11 1. 00 13 5 9 Price ($ per kg) Market Demand Supply Schedules for Strawberries S 0 S 1 Surplus a 2. 00 b 1. 50 1. 00 0 D 0 1 3 5 7 9 11 13 15 Quantity (millions of kg per year) 17