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Google market equilibrium examples demand and supply functions example problems

REvenue Profit and Cost Functions examples

When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

Putting the supply and demand curves from the previous sections together. These two curves will intersect at Price = $6, and Quantity = 20. In this market, the equilibrium price is $6 per unit, and equilibrium quantity is 20 units. At this price level, market is in equilibrium. Quantity supplied is equal to quantity demanded ( Qs = Qd). Market is clear.

Surplus and shortage: If the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus. Market price will fall.

Example: if you are the producer, you have a lot of excess inventory that cannot sell. Will you put them on sale? It is most likely yes. Once you lower the price of your product, your products quantity demanded will rise until equilibrium is reached. Therefore, surplus drives price down. If the market price is below the equilibrium price, quantity supplied is less than quantity demanded, creating a shortage. The market is not clear. It is in shortage. Market price will rise because of this shortage. Example: if you are the producer, your product is always out of stock. Will you raise the price to make more profit? Most for-profit firms will say yes. Once you raise the price of your product, your products quantity demanded will drop until equilibrium is reached. Therefore, shortage drives price up. If a surplus exist, price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated. If a shortage exists, price must rise in order to entice additional supply and reduce quantity demanded until the shortage is eliminated.
If the market price (P) is higher than $6 (where Qd = Qs), for example, P=8, Qs=30, and Qd=10. Since Qs>Qd, there are excess quantity supplied in the market, the market is not clear. Market is in surplus. THE PRICE WILL DROP BECAUSE OF THIS SURPLUS

If the market price is lower than equilibrium price, $6, for example, P=4, Qs=10, and Qd=30. Since Qs<Qd, There are excess quanitty demanded in the market. Market is not clear. Market is in shortage. THE PRICE WILL RISE DUE TO THIS SHORTAGE.

Government regulations will create surpluses and shortages in the market. When a price ceiling is set, there will be a shortage. When there is a price floor, there will be a surplus. Price Floor: is legally imposed minimum price on the market. Transactions below this price is prohibited. Policy makers set floor price above the market equilibrium price which they believed is too low. Price floors are most often placed on markets for goods that are an important source

of income for the sellers, such as labor market. Price floor generate surpluses on the market. Example: minimum wage. Price Ceiling: is legally imposed maximum price on the market. Transactions above this price is prohibited. Policy makers set ceiling price below the market equilibrium price which they believed is too high. Intention of price ceiling is keeping stuff affordable for poor people. Price ceiling generates shortages on the market. Example: Rent control.

Changes in equilibrium price and quantity:

Equilibrium price and quantity are determined by the intersection of supply and demand. A change in supply, or demand, or both, will necessarily change the equilibrium price, quantity or both. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same. Example: This example is based on the assumption of Ceteris Paribus. 1) If there is an exporter who is willing to export oranges from Florida to Asia, he will increase the demand for Floridas oranges. An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity. 2) If there is an importer who is willing to import oranges from Mexico to Florida, he will increase the supply for Floridas oranges. An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity. 3) What will happen if the exporter and importer enter the Floridas orange market at the same time? From the above analysis, we can tell that equilibrium quantity will be higher. But the import and exporters impact on price is opposite. Therefore, the change in equilibrium price cannot be determined unless more details are provided. Detail information should include the exact quantity the exporter and importer is engaged in. By comparing the quantity between importer and exporter, we can determine who has more impact on the market. In the following table, an example of demand and supply increase is illustrated.

In this graph, supply is constant, demand increases. As the new demand curve (Demand 2) has shown, the new curve is located on the right hand side of the original demand curve. The new curve intersects the original supply curve at a new point. At this point, the equilibrium price (market price) is higher, and equilibrium quantity is higher also.

In this graph, demand is constant, and supply increases. As the new supply curve (SUPPLY 2) has shown, the new curve is located on the right side of the original supply curve. The new curve intersects the original demand curve at a new point. At this point, the equilibrium price (market price) is lower, and the equilibrium quantity is higher.

In this graph, the increased demand curve and increased supply were drawn together. The new intersection point is located on the right hand side of the original intersection point. This new equilibrium point indicated an equilibrium quantity which is higher than the original equilibrium quantity. The equilibrium price is also higher. It is because demand has increased relatively more than supply in this case.

This supply and demand factor exercises may help you better apply these concepts.

MARKET EQUILIBRIUM

http://staffwww.fullcoll.edu/fchan/Micro/1MKTEQUIL.htm

http://tutor2u.net/economics/revision-notes/as-markets-equilibrium-price.html

http://www.washburn.edu/sobu/rwalker/EC200/Notes/Chapter_3.pdf

http://library.thinkquest.org/03oct/00921/supplyanddemand.htm

http://www.investopedia.com/university/economics/economics3.asp#axzz1jjW4H9QD

http://www.oswego.edu/~edunne/200ch3_3.html

http://earthmath.kennesaw.edu/main_site/review_topics/economics.htm

http://www.zweigmedia.com/RealWorld/tutorialsf0/framesF2A.html

http://www.google.com.ph/url?sa=t&rct=j&q=revenue%20profit%20and%20cost%20functions%20exam ples&source=web&cd=4&ved=0CDkQFjAD&url=http%3A%2F%2Fmath.arizona.edu%2F~kerimar%2FDem and%2C%2520Revenue%2C%2520Cost%2C%2520%26%2520Profit.ppt&ei=KaYVT7FJ6qjiQLyqfHWDQ&usg=AFQjCNFByTDBiJ9jO871f-tc0z0MKrsenQ&sig2=cRIb_GaTu9tdkd8lTmyqCw

http://www.dummies.com/how-to/content/how-to-determine-marginal-cost-marginal-revenue-an.html

Chapter 3 Supply and Demand III. Market Equilibrium Now we put together the behavior of buyers (part one) and the behavior of sellers (part two) to have a model of the whole market for pizza. Market Equilibrium Recall the demand and supply schedules for pizza delivered in Oswego in a week:

Price of pizza $25 $20 $15 $10 $5

Quantity of pizza demanded (per week in Oswego) 100 210 300 500 650

Quantity of pizza supplied (per week in Oswego) 800 700 625 500 300

Note that at a price of $10, the quantity supplied = the quantity demanded = 500. If we plot the supply and demand curves on the same set of axes, we get the following illustration of the pizza market:

The supply and demand curves intersect at the point where quantity supplied = quantity demanded. This intersection is what we call an equilibrium price. This is the price where the intentions of both the buyer and seller are compatible: Buyers want to buy the exact amount the sellers want to sell. Why is (500, $10) an equilibrium? To understand why, let's think about what would happen if the price was greater than or less than $10.
y

If the price is greater than $10, say $20, the quantity demanded = 210 and the quantity supplied = 700. The result would be a huge surplus of 490 pizzas produced, with no one willing to buy them for $20. This surplus would force prices to fall, causing pizza supplies to cut back production and pizza buyers would be willing to buy more pizzas as the price falls, until the price reaches $10. If the price is less than $10, say $5, the quantity demanded = 650 and the quantity supplied = 300. The result would be a shortage of 350 pizzas. This shortage would force prices up, causing pizza suppliers to produce more and consumers to buy less, until the price reaches $10.

So an equilibrium point is a point of rest, where there is no incentive for buyers or sellers to change their decisions. However, if one of the other factors affecting

demand and supply change, then the demand and/or supply curves will shift, and a new equilibrium will result. Let's consider a few examples Changes in Equilibrium Let's consider a few examples. Example 1: Suppose that the price of Chinese food delivery rises. What happens to the market for pizza? Let's figure this out with a 3 step approach:
y y

Step 1: Will this affect the demand or supply curve? Chinese food is a substitute for pizza, so the price of chinese food affects the demand curve Step 2: In what direction will the affected curve move? The price of chinese food, a substitute, INCREASES, so the demand for pizza INCREASES, or the demand curve shifts right. Step 3: What is the resulting impact on the equilibrium price and quantity? This is easiest to answer with a graph. If you look at the graph below you will see that the new equilibrium has a higher price and larger quantity. An increase in demand results in an increase in price and quantity.

Example 2: Suppose instead that the Chinese food business is incredibly popular and profitable. What happens to the market for pizza? Again, we use the same three step approach:
y y

Step 1: Will this affect the demand or supply curve? The chinese food business is an alternative to the pizza business, affecting the supply curve Step 2: In what direction will the affected curve move? The profitability of chinese food means that some pizza places will switch to chinese food places, so the supply of pizza DECREASES, or the supply curve shifts left. Step 3: What is the resulting impact on the equilibrium price and quantity? This is easiest to answer with a graph. If you look at the graph below you will see that the new equilibrium has a higher price and smaller quantity. An decrease in supply results in an increase in price and a decrease in quantity.

Example 3: Now lets combine examples 1 and 2 so that the demand for pizza increases AND the supply of pizza decreases. What happens to the market for pizza?
y y

we know an increase in demand will increase equilibrium price and increase quantity. we know a decrease in supply will increase equilibrium price and decrease quantity.

put both together the equilibrium price will increase but the affect on quantity is uncertain, and depends on whether the shift in demand is smaller or larger than the shift in supply. As I have draw the graph below, there is no change in quantity.

The table below summarizes how changes in demand and supply affect equilibrium price (P) and quantity (Q).

no change in supply (no shift) increase in supply (shift right) decrease in supply (shift left)

no change in demand (no shift) no change in P no change in Q P decreases Q increases P increases Q decreases

increase in demand (shift right) P increases Q increases P? Q increases P increases Q?

decrease in demand (shift left) P decreases Q decreases P decreases Q? P? Q decreases

Want to test your understanding? The links below will allow you to test your understanding of supply and demand. Your CD ROM also has self-quizzes on chapter 3.

Check Your Head -- A chapter 3 quiz on your textbook's web site. Exploring Supply and Demand-- An online quiz on supply and demand by Kim Sosin