Market Equilibrium

1
Market Equilibrium What is an Equilibrium? -
Situation where no one wants to change
behavior Balanced Opposing Forces Market
Equilibrium determines Equilibrium Price and
Quantity Equilibrium Price is the price where
quantity demanded quantity supplied Equilibrium
Quantity is the quantity bought and sold at the
equilibrium price
2
Market Equilibrium

• Quantity Quantity Shortage()
• Price demanded supplied or surplus()
• (dollars
• per disc) (millions of discs per week)
• 0.50 9 0 -9
• 1.00 6 3 -3
• 1.50 4 4 0
• 2.00 3 5 2
• 2.50 2 6 4

3
Market Equilibrium
3.00
2.50
Price (dollars per disc)
2.00
Equilibrium
1.50
1.00
0.50
Demand for CD-Rs
0 2 4 6 8 10
Quantity (millions of discs per week)
4
Effect on Equilibrium of Shifts in Demand and
Supply Demand Increase (why?) (shift out) ? P
? Q ? Demand Decrease (why?) (shift in) ? P ? Q
? Supply Increase (why?) (shift out) ? P ? Q
? Supply Decrease (why?) (shift in) ? P ? Q ?
5
The Effects of a Change in Demand
3.00
2.50
Price (dollars per disc)
2.00
1.50
1.00
Demand for CD-Rs (CD Burner 100)
0.50
Demand for CD-Rs (CD Burner 300)
0 2 4 6 8 10 12
14
Quantity (millions of discs per week)
6
The Effects of a Change in Supply
Supply of CD-Rs (old technology)
3.00
2.50
Price (dollars per disc)
2.00
Supply of CD-Rs (new technology)
1.50
1.00
0.50
Demand for CD-Rs
0 2 4 6 8 10 12
14
Quantity (millions of discs per week)
7
The Effects of an Increase in Both Demand and
Supply
Supply of CD-Rs (old technology)
Supply of CD-Rs (new technology)
3.00
2.50
Price (dollars per disc)
2.00
1.50
1.00
0.50
Demand for CD-Rs (CD Burner 300)
0 2 4 6 8 10 12
14
Quantity (millions of discs per week)
8
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of CD-Rs (old technology)
3.00
Supply of CD-Rs (new technology)
2.50
Price (dollars per disc)
2.00
1.50
1.00
Demand for CD-Rs (MP3 downloads free)
0.50
Demand for CD-Rs (MP3 downloads 10)
0 2 4 6 8 10 12
14
Quantity (millions of discs per week)
9
Effect on market for Butter of ? Price of
margarine ? Price of bread ? News butter is
bad for you ? Usage of milk-producing
hormones ? Price of beef
10
Effect on market for Fords of ? Price of
gasoline ? Bus/subway fares ? Price of
steel ? Supply of rubber ? Cost of video/data
transmission ? Import tariffs on Japanese
cars Invention of the transporter
11
Effect on market for Licensed Daycare of ?
Child/staff ratio regulation ? Enforcement of
tax laws on in-home workers ? Fertility ?
News that stay-home children do better in
school ? Price of oranges ? Minimum wage
12
Effect on market for Steak in Restaurants of
? Openings of Chinese restaurants ? Sales tax
? News that meat is healthy ? Cost of feed
grains ? Charges for refrigerated
freight Passage of a no-smoking ordinance