Economics
Market Equilibrium
Market equilibrium is a state where the quantity of a good or service supplied by producers equals the quantity demanded by consumers, resulting in a stable price. At this point, there is no tendency for the price to change because the market is in balance. It is a key concept in understanding how markets function and the interplay between supply and demand.
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12 Key excerpts on "Market Equilibrium"
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
As noted earlier, buyers are assumed to be motivated primarily by the desire to increase their personal satisfaction in life. Sellers are assumed to be motivated by the desire to make the largest profits possible. This interaction between buyers and sellers results in equilibrium in the market. Equilibrium is defined to be the point at which Q s = Q d at a common price. If the market price is not at equilibrium, market forces drive the market toward equilibrium. If the market price is at equilibrium, there exists no market pressure to move to some other level. To better understand this concept, consider Figure 7.3. The market represented in Figure 7.3 is in equilibrium at point Ε because Q s = Q d at the common price of P v To better understand the concept of equilibrium, it is useful to examine the market at other prices. First, consider a mar-ket price above the equilibrium value. At P 2 , the quantity supplied, Q v is larger than the quantity demanded, Q 2 . At this price, sellers are willing to provide more to the market than consumers are willing to buy. This situation is defined as a surplus. To combat their rising inventories, sellers begin to lower their prices, attempting to entice consumers to buy more. In addition, because of the lower price, sell-ers decrease the amount they offer for sale. As this process unfolds, there is an increase in Q d and a decrease in Q s as the market moves to the equilibrium at point E. Now consider a market price below the equilibrium value. At the price P v the quantity demanded, Q } , exceeds the quantity supplied, Q 2 , resulting in a shortage in the mar-ket. In response to the shortage, consumers begin to bid up the price. To understand this process, consider the process of an auction.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
To repeat, buyers prefer a lower price and sellers prefer a higher price. A mar-ket reaches equilibrium when the quantity demanded equals quantity supplied. In equilibrium , the independent plans of buyers and sellers exactly match, so market forces exert no pressure for change. In Exhibit 5, the demand and supply curves intersect at the equilibrium point, identified as point c . The equilibrium price is $9 per pizza, and the equilibrium quantity is 20 million per week. At that price and quantity, the market clears . Because there is no shortage or surplus, there is no pressure for the price to change. The demand and supply curves form an “x” at the intersection. You could say that the equilibrium point is found where “x” marks the spot. Markets indicate the price, quantity, and variety of goods available to you—from the latest social network to the smartest phone. You should be interested in equilibrium prices because they are what you usually pay for the thousands of goods and services you consume. A market finds equilibrium through the independent actions of thousands, or even millions, of buyers and sellers. In one sense, the market is personal because each con-sumer and each producer makes a personal decision about how much to buy or sell at a given price. In another sense, the market is impersonal because it requires no conscious communication or coordination among consumers or producers. The price does all the talking. Impersonal market forces synchronize the personal and indepen-dent decisions of many individual buyers and sellers to achieve equilibrium price and quantity . Prices reflect relative scarcity. For example, to rent a 26-foot truck one-way from San Francisco to Austin, U-Haul recently charged $3,236. Its one-way charge for that same truck from Austin to San Francisco was just $399.
eBook - PDF- David Stager(Author)
- 2013(Publication Date)
- Butterworth-Heinemann(Publisher)
At a price above equi-librium price, the pressure of excess supply leads to a lower price; at a price below the equilibrium price, the pressure of excess demand leads to a higher price. The equilibrium of a product market will be disturbed, leading to a new equilibrium price and quantity, when there is a shift either in demand or in supply. It is possible that a shift of both demand and supply will leave either price or quantity unchanged, but not both. 12. The equilibrium price and quantity in each market are dependent on changes occurring in other markets. When all markets are in equilibrium, the economy is in general equilibrium; all products are being produced as efficiently as possible and all individuals are realizing as much satisfaction as possible, given the state of technol-ogy and the level and distribution of incomes. The concept of gen-eral equilibrium is most useful in explaining the process whereby markets adjust to changes and in predicting the direction of changes in each market. Key Concepts and Topics independence of supply and law of demand demand quantity demanded demand relative prices demand schedule shift or change in demand demand curve substitute goods Demand, Supply, and Market Prices 57 Questions for Review and Discussion 1. (a) Why are economists so interested in the equilibrium price of a commodity when the actual or observed price is often different from the equilibrium price? (b) What forces are at work to move the price of a commodity toward its equilibrium price? 2. List five commodities for which you think the demand is inelastic, and five for which the demand is elastic, over the range of prices usually observed for these commodities. Explain why the demand would be inelastic or elastic in each case.
eBook - PDF- David Besanko, Ronald Braeutigam(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
equilibrium A point at which there is no tendency for the market price to change as long as exogenous variables remain unchanged. excess supply A situation in which the quantity supplied at a given price exceeds the quantity demanded. excess demand A situ- ation in which the quantity demanded at a given price exceeds the quantity sup- plied. Quantity (billions of bushels per year) Price (dollars per bushel) 13 14 11 8 9 $5 $3 Excess supply when price is $5 $4 E S D Excess demand when price is $3 FIGURE 2.5 Excess Demand and Excess Supply in Market for Corn If the price of corn were $3, per bushel, excess demand would result because 14 billion bush- els would be demanded, but only 9 billion bushels would be supplied. If the price of corn were $5 per bushel, excess supply would result because 13 billion bushels would be supplied but only 8 billion bushels would be demanded. L E A R N I N G - B Y- D O I N G E X E R C I S E 2 . 3 Calculating Equilibrium Price and Quantity Suppose the market demand curve for cranberries is given by the equation Q d = 500 − 4P, while the mar- ket supply curve for cranberries (when P ≥ 50) is described by the equation Q s = −100 + 2P, where P is the price of cranberries expressed in dollars per barrel, and quantity (Q d or Q s ) is in thousands of bar- rels per year. Problem At what price and quantity is the market for cranberries in equilibrium? Show this equilibrium graphically. Solution At equilibrium, the quantity supplied equals the quantity demanded, and we can use this relationship to solve for P: Q d = Q s , or 500 − 4P = −100 + 2P, which 35 2.1 DEMAND, SUPPLY, AND Market Equilibrium SHIFTS IN SUPPLY AND DEMAND Shifts in Either Supply or Demand The demand and supply curves discussed so far in this chapter were drawn under the assumption that all factors, except for price, that influence the quantity demanded and quantity supplied are fixed.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
Learning Objectives • Understand how the behavior of buyers and sellers can be characterized through demand and supply curves. • Explain how equilibrium price and quantity are determined in a market for a good or service. • Analyze how a Market Equilibrium is affected by changes in demand or supply. • Explore the effects of government intervention in markets and how a price ceiling impacts price, quantity supplied, quantity demanded, and the welfare of buyers and sellers. • Show how elasticities provide a quantitative measure of the responsiveness of quantity demanded or supplied to a change in some other variable such as price or income. • *Explain the mathematics associated with elasticities. 14 Chapter Two • Supply and Demand • Demand and Supply Curves Markets are composed of buyers and sellers. Our analysis of the behavior of buyers relies on demand curves; supply curves depict the behavior of sellers. Let’s begin with the buyer, or demand, side of the market. The Demand Curve The amount of a good that a consumer or a group of consumers wishes to purchase depends on many factors: income, age, occupation, education, experience, buyer preferences, taxes, subsidies, expectations, and so on. It also depends on the price of the good. According to the law of demand, the lower the price of a good, the larger the quantity consumers wish to pur- chase. To this law we must add an important condition. The relationship will hold only if the other factors affecting consumption, such as income and preferences, do not change at the same time that the good’s price changes. The assumption that all other factors remain constant is an important one to keep in mind when examining many relationships in economics. Figure 2.1 shows a hypothetical market demand curve for 55-inch flat-screen televisions (TVs). At each possible price, the curve identifies the total quantity desired by consumers.
eBook - PDF- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ............................................................................................................................................................................................. 4-1 CHANGES IN Market Equilibrium Using market supply and demand analysis is like putting on glasses if you are near-sighted. Suddenly, the fuzzy world around you comes into clear focus. Many people believe that prices are set by sellers adding a certain percentage to their costs. If costs rise, sellers simply raise their prices by that percentage. In free markets, there is more to the story. In the following examples, you will open your eyes and see that economic theory has something important to say about so many things in the real world. 4-1a CHANGES IN DEMAND The Caribbean cruise market shown in Exhibit 1(a) assumes market supply, S , is con-stant and market demand increases from D 1 to D 2 . Why has the demand curve shifted rightward in the figure? We will assume the popularity of cruises to these vacation islands has suddenly risen sharply due to extensive advertising that influenced tastes and preferences. Given supply curve S and demand curve D 1 , the initial equilibrium price is $600 per cruise, and the initial equilibrium quantity is 8,000 cruises per year, shown as point E 1 . After the impact of advertising, the new equilibrium point, E 2 , becomes 12,000 cruises per year at a price of $900 each. Thus, the increase in demand causes both the equilibrium price and the equilibrium quantity to increase.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level. 3.2 Shifts in Demand and Supply for Goods and Services Economists often use the ceteris paribus or “other things being equal” assumption: while examining the economic impact of one event, all other factors remain unchanged for analysis purposes. Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about future conditions and prices. Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies. 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand diagram to think about what the market looked like before the event; (2) decide whether the event will affect supply or demand; (3) decide whether the effect on supply or demand is negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare the new equilibrium price and quantity to the original ones. 3.4 Price Ceilings and Price Floors Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.
eBook - PDF- Neva Goodwin, Jonathan M. Harris, Julie A. Nelson, Brian Roach, Mariano Torras, Jonathan Harris, Julie Nelson(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
The price will stop falling or rising. The theory of market adjustment says that market forces will tend to make price and quantity move toward the equilibrium point. Surpluses will lead to falling prices, and shortages will lead to ris-ing prices. Surplus and shortage are both instances of market disequilibrium . Only at the equilibrium price and quantity is there no tendency for market adjustment. In this example, the equilibrium price is $1.10 per cup and the equilibrium quantity is 700 cups per week. shortage: a situation in which the quantity demanded at a particular price exceeds the quantity that sellers are willing to supply theory of market adjustment: the theory that market forces will tend to make shortages and surpluses disappear market disequilibrium: a situation of either shortage or surplus Market Equilibrium: a situation in which the quantity supplied equals the quantity demanded, and thus there is no pressure for change in price or quantity bought or sold Figure 4.8 A Market Shortage 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 0 200 400 600 800 100 0 1 20 0 Price of Coffee ($ per Cup) Cups of Coffee per Week Demand Suppl y Shortage (S=400) (D=800) T HE T HEORY OF M ARKET A DJUSTMENT 97 Figure 4.9 Market Equilibrium 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 0 200 400 600 800 1000 1200 Price of Coffee ($ per Cup) Cups of Coffee per Week Demand Supply Equilibrium 4.2 M ARKET F ORCES AND O THER C ONSIDERATIONS We know that market forces will tend to push the price of coffee toward the equilibrium price, but how long will this adjustment process take? Just a couple of weeks, a month, maybe longer? We do not know, as our simple model doesn’t address this issue. 14 In the real world, some markets have adjust -ment processes that lead rapidly to equilibrium.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
The inclusion of strawberries on the list has led to an increase in demand for organic strawberries, resulting in both a higher equilibrium price and quantity of sales. 74 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col12170/1.7 ceteris paribus complements consumer surplus deadweight loss demand demand curve demand schedule economic surplus equilibrium equilibrium price equilibrium quantity excess demand excess supply factors of production inferior good inputs law of demand law of supply normal good price price ceiling price control KEY TERMS other things being equal goods that are often used together so that consumption of one good tends to enhance consumption of the other the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid the loss in social surplus that occurs when a market produces an inefficient quantity the relationship between price and the quantity demanded of a certain good or service a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis a table that shows a range of prices for a certain good or service and the quantity demanded at each price see social surplus the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change the price where quantity demanded is equal to quantity supplied the quantity at which quantity demanded and quantity supplied are equal for a certain price level at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs a good in which the quantity demanded falls as income rises, and in which quantity demanded rises
- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
The inclusion of strawberries on the list has led to an increase in demand for organic strawberries, resulting in both a higher equilibrium price and quantity of sales. 74 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col23729/1.3 ceteris paribus complements consumer surplus deadweight loss demand demand curve demand schedule economic surplus equilibrium equilibrium price equilibrium quantity excess demand excess supply factors of production inferior good inputs law of demand law of supply normal good price price ceiling price control KEY TERMS other things being equal goods that are often used together so that consumption of one good tends to enhance consumption of the other the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid the loss in social surplus that occurs when a market produces an inefficient quantity the relationship between price and the quantity demanded of a certain good or service a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis a table that shows a range of prices for a certain good or service and the quantity demanded at each price see social surplus the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change the price where quantity demanded is equal to quantity supplied the quantity at which quantity demanded and quantity supplied are equal for a certain price level at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs a good in which the quantity demanded falls as income rises, and in which quantity demanded rises
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2014(Publication Date)
- Openstax(Publisher)
A demand curve shows the relationship between quantity demanded and price in a given market on a graph. The law of demand states that a higher price typically leads to a lower quantity demanded. A supply schedule is a table that shows the quantity supplied at different prices in the market. A supply curve shows the relationship between quantity supplied and price on a graph. The law of supply says that a higher price typically leads to a higher quantity supplied. The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level. 3.2 Shifts in Demand and Supply for Goods and Services Economists often use the ceteris paribus or “other things being equal” assumption: while examining the economic impact of one event, all other factors remain unchanged for the purpose of the analysis. Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about future conditions and prices. Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at Chapter 3 | Demand and Supply 73 any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
The inclusion of strawberries on the list has led to an increase in demand for organic strawberries, resulting in both a higher equilibrium price and quantity of sales. 74 Chapter 3 | Demand and Supply This OpenStax book is available for free at http://cnx.org/content/col12122/1.4 ceteris paribus complements consumer surplus deadweight loss demand demand curve demand schedule economic surplus equilibrium equilibrium price equilibrium quantity excess demand excess supply factors of production inferior good inputs law of demand law of supply normal good price price ceiling price control KEY TERMS other things being equal goods that are often used together so that consumption of one good tends to enhance consumption of the other the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid the loss in social surplus that occurs when a market produces an inefficient quantity the relationship between price and the quantity demanded of a certain good or service a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis a table that shows a range of prices for a certain good or service and the quantity demanded at each price see social surplus the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change the price where quantity demanded is equal to quantity supplied the quantity at which quantity demanded and quantity supplied are equal for a certain price level at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs a good in which the quantity demanded falls as income rises, and in which quantity demanded rises
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