Market Equilibrium &

Efficiency
Where Demand meets Supply
Learning outcomes:
Explain the interaction of supply & demand
to produce market equilibrium.
Analyze using diagrams how changes in the
non-price determinants of supply/demand
change market equilibrium.
Identify using diagrams, excess supply &
demand in a market.
Market Equilibrium
Market Equilibrium:
the price where the
quantity demanded is
equal to the quantity
supplied.
Also called market
clearing price
Excess Supply
Market disequilibrium
where the market is not
efficient.
Occurs when the price is
set above the market
clearing price such that
Quantity Supplied >
Quantity Demanded
Excess Demand
Market disequilibrium
where the market is not
efficient.
Occurs when the price is
set below the market
clearing price.
Quantity Demanded >
Quantity Supplied
http://www.amosweb.com/images/ExDm001w.gif
Function of Price
1. Price is the system used to organize the
allocation of our scarce resources. Answers:
How & What...
2. Decrease supply (S-S1) causes excess
demand at price P : Qd (e) > Qs (e1).
3. Incentive for firms to increase Price from P-
P1. Movement along the supply curve from
e1 - e2 decreasing Quantity supplied.
4. As Price increases, the Rationing effect of
consumers to decrease Qd moving along the
Demand curve from e - e2.
5. Market eventually reaches clearing price &
quantity at e2.
Changes in Demand
1. Increase in Demand (D1-D2).
2. At Price P1 - Qd2 >Qs1 creating
excess demand at P1.
3. Signal to the market to increase
price from P1 - P2 thus increasing
the Qs.
4. Therefore, an increase in Demand
from D1 - D2 due to a change in a
non-price determinant of Demand
leads to an increase in Price from
P1 - P2 and an increase in
Quantity Supplied from Q1 - Q2.
http://www.personal.psu.edu/~dxl31/econ2/Spring_2006/demand_increase.png
Decrease in Demand
1. Decrease in Demand (D-Dnew).
2. At Price P1 - Qs > Qdnew creating
excess supply at P1.
3. Signal to the market to decrease
price from P1 - P2 thus decreasing
the Qs.
4. Therefore, a decrease in Demand
from D - Dnew due to a change in a
non-price determinant of Demand
leads to an decrease in Price from
P1 - P2 and a decrease in Quantity
Supplied from Q1 - Q2.
http://www.raybromley.com/notes/noteimages/equilibrium/decrdemandeq.jpg
Increase Supply
1. Increase in Supply (S - S1).
2. At Price P - Qs1 >Qd creating
excess supply at P.
3. Signal to the market to decrease
price from P - P1 thus increasing
the Qd from Q - Q1.
4. Therefore, an increase in Supply
from S - S1 due to a change in a
non-price determinant of Supply
leads to an decrease in Price from
P - P1 and an increase in Quantity
Demanded from Q - Q1.
Decrease Supply
1. Decrease in Supply (S - S1).
2. At Price P - Qd > Qs1 creating
excess demand at P.
3. Signal to the market to increase price
from P - P1 thus decreasing the Qd
from Q - Q1.
4. Therefore, an decrease in Supply
from S - S1 due to a change in a non-
price determinant of Supply leads to
an increase in Price from P - P1 and
an decrease in Quantity Demanded
from Q - Q1