Economics '28 Dr/ Nadia

Chapter (4) : Equilibrium

Where supply meets demand

4.1 What is a market?

What is a market?
• A market is any setting that brings together potential buyers and sellers.
• We often refer to sellers as "supplier" and buyers as "demander".
➔ Markets are everywhere, organizing most of what we do.
• Market A setting bringing together potential buyers and sellers, the supply and demand curves that we have
studied so far are most appropriate for analyzing markets that characterized by perfect competition.
Equilibrium
Is a stable situation, with no tendency to change, a market in equilibrium when the quantity supplied is equal to the
quantity demanded
➔ In equilibrium, every seller who wants to sell an item can find a buyer, and every buyer
can find a willing seller.
➔ Because of this balancing, there is no tendency for the market price to change when a
market is in supply-equals-demand equilibrium.
➔ There is only one price at which the quantity supplied equals the quantity demanded.
This is referred to as the equilibrium price; the resulting quantity is called the equilibrium
quantity.
Some definitions:

Equilibrium The point at which there is no tendency for change. A market is in equilibrium when the
quantity supplied equals the quantity demanded.

Equilibrium price The price at which the market is in equilibrium.

Equilibrium quantity The price at which the market is in equilibrium.

The equilibrium occurs at the point at which the market supply and

demand curves cross, because this is the point at which the

quantity supplied equals the quantity demanded.

Page 1 of 5
Economics '28 Dr/ Nadia

4.2 How markets bring supply and demand into balance

The following table lists both the quantity demanded at each price and the quantity supplied at each price.

Graphing the price against the quantity demanded yields the downward -
slopping market demand curve .

Graphing the price against the quantity supplied yields the up-sloping
market supply.

Explanation :
occurs at the point at which the quantity demanded is equal to the quantity
Equilibrium supplied and this occurs where the curves cross.

Surplus : When the quantity demanded is less than the quantity supplied
Surplus leads the price to fall ➔ When the price is above its equilibrium ($4) a surplus as result the
quantity of gas supplied far exceeds the quantity demanded. Gas station
owners, trying to sell Surplus If price is $4 Equilibrium Supply curve 2 $4
$3 $2 Shortage If price is $2 Demand curve off their unsold gas, will
charge lower prices in the hopes of attracting more customers;

➔ This will push the price down to $3 per gallon, eliminating this surplus.

When the quantity of gas demanded (2.4 billion gallons) far exceeds the
Shortage leads the price to rise quantity supplied (1.5 billion gallons) there are too many people choosing to
little gas, leading to shortages, as result, individual gas stations find themselves
selling out of gas, facing long queues of desperate customers.

➔ As long as the shortage persists you will keep marking up your price.
Until the gas shortage is eliminated this occurs when the price is $3.

Page 2 of 5
 Economics '28 Dr/ Nadia

Note that !

The forces of competition push markets toward the equilibrium price, thereby eliminating any shortages or surplus. So it
is only when a market reaches equilibrium that supply and demand will be in balance, and so there will be no tendency
for the price to change.

4.3 predicating market changes.

Meaning that to predict how prices will change when economic conditions change.

Shifts in demand
The market demand curve summarizes people current buying plans, but if those plans shift, then so will the market
demand curve, including income, preferences, the price of related goods, expectations, network effects, and the type
and number of buyers.
➔ All the previous factors shift demand curves.
➔ So following a shift in demand, the market will move to a new equilibrium

An increase in demand A decrease in demand

An increase in demand leads to a higher price and a A decrease in demand leads to a lower price and a
lager quantity. smaller quantity.

♦So demand shifts lead price & quantity to move in the same direction♦

Shifts in supply
There are several factors that shift supply.
➔ For example input prices, productivity, prices of related outputs, expectation, and type and number of sellers

A shift that increases the quantity suppliers plan to sell at each price is an increase in supply and shifts the supply curve
to the right. The opposite –a decrease in supply- shifts the curve to the left.

Page 3 of 5
 Economics '28 Dr/ Nadia

The following figure shows these shifts.

An increase in supply A decrease in supply

An increase in supply leads to a lower price and a lager A decrease in supply leads to a higher price and a
quantity. smaller quantity.

♦So supply shifts leads price and quantity to move in opposite direction ♦

When both supply & demand shift

What happens when both supply & demand shift at the same time?
Fortunately, the same rules still hold, and when more than one curve shifts, you can simply add up the effects.
The effect of two shifts can depend on which curve shifts -the most- the following are two cases

Case 1: a big decrease demand shift with a small decrease supply shift

Case 2: a small decrease shift in demand with a big decrease shift in supply

Page 4 of 5
Economics '28 Dr/ Nadia

‫الخالصة‬
Getting to equilibrium

With a surplus prices are falling, discounting may occur, sellers may queue to find buyers, and sometimes extra get
bundled for free.

With a shortage prices rising, buyers may queue to meet sellers, and sometimes there are secondary markets and/or
bundling of unnecessary costly extras.

Shift in demand Shift in demand

• If the price and quantity move in the same • If the price and quantity move in the opposite
direction then you know that the demand curve direction then you know that the supply curve has
has shifted. shifted

• An increase in demand raises the quantity and • A decrease in supply raises the price and lowers the
price. quantity

• A decrease in demand lowers the price and • An increase in supply raises the quantity and lowers the
quantity price

Page 5 of 5