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Equilibrium Price

DEMAND AND SUPPLY AND EQUILIBRIUM PRICE

Equilibrium price and output: Equilibrium means that forces working on a variable are in balance so that there is no tendency for it to change; here it means prices of goods and the quantities exchanged between buyers and sellers. This will be achieved when quantity demanded equals quantity supplied

DEMAND AND SUPPLY AND EQUILIBRIUM PRICE


response to shortages and surpluses
shortage (D > S)
price rises

surplus (S > D)
price falls

equilibrium D=S price is stable

SUPPLY AND DEMAND TOGETHER

Equilibrium Price
The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect.

Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

DEMAND AND SUPPLY AND EQUILIBRIUM PRICE

Characteristics of the equilibrium or market clearing price: QD = QS No shortage No excess supply No pressure on the price to change

Equilibrium price and output:


The Market Demand and Supply of Potatoes (Monthly)
Price of Potatoes
(Rs per kg)

Total Market Demand


(Tonnes: 000s)

Total Market Supply


(Tonnes: 000s)

20 40 60 80 100

700 (A) 500 (B) 350 (C) 200 (D) 100 (E)

100 (a) 200 (b) 350 (c) 530 (d) 700 (e)

The determination of market equilibrium


100

(potatoes: monthly)
(a) Excess Demand d D Cc b
SHORTAGE (300 000) B

e Supply

80

Price (Rs per kg)

60

40

a
20

A
Demand

0 0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Equilibrium

Shortage When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

The determination of market equilibrium (potatoes: monthly)


100

E
(b) Excess Supply D SURPLUS (330 000)

e Supply

80

Price (Rs per kg)

60

Cc
b

40

B A
Demand

a
20

0 0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Equilibrium

Surplus When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

The determination of market equilibrium (potatoes: monthly)


100

E D
d

e Supply

80

Price (Rs per kg)

60

40

B A
Demand

a
20

0 0 100 200 300

Qe

400

500

600

700

800

Quantity (tonnes: 000s)

Effect of a shift in the demand curve


P

Pe 2 Pe 1

i g h

D2 D1
O Qe1 Qe2 Q

Effect of a shift in the supply curve


P

S2 S1 k
Pe 3 Pe 1

D
O Qe3 Qe1 Q

Figure The Equilibrium of Supply and Demand

Price of Ice-Cream Cone

Supply

Rs2.00

Equilibrium price

Equilibrium

Equilibrium quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13

Demand

Quantity of Ice-Cream Cones

Figure How an Increase in Demand Affects the Equilibrium


Price of Ice-Cream Cone

1. Hot weather increases the demand for ice cream . . .

Supply Rs2.50 2.00 2. . . . resulting in a higher price . . . Initial equilibrium D D 0 3. . . . and a higher quantity sold. 7 10 Quantity of Ice-Cream Cones New equilibrium

Figure How a Decrease in Supply Affects the Equilibrium


Price of Ice-Cream Cone S2

1. An increase in the price of sugar reduces the supply of ice cream. . . S1

Rs2.50 2.00 2. . . . resulting in a higher price of ice cream . . .

New equilibrium Initial equilibrium

Demand

7 3. . . . and a lower quantity sold.

Quantity of Ice-Cream Cones

What Happens to Price and Quantity When Supply or Demand Shifts?

Food for thought ....


The Effect on the Market for Tennis Balls of a Decline in Court Rental Fees Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet Access The Effect of a Pay Raise on the Rent for Apartments in Delhi The Effect of the Release of Jurassic Park on the Market for Toy Dinosaurs The Effect of a Credible Rumor on the Market for Apple Computers The Effect of the Increase in the Population of Potential Buyers The Effect on the Skateboard Market of an Increase in the Price of Fiberglass The Effect on the Market for New Houses of a Decline in Carpenters Wage Rates

The Effect on the Market for Tennis Balls of a Decline in Court Rental Fees
Price (Rs/ball)

1.40 1.00
D D
Quantity

40

58

Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet Access
Price (Rs/letter)

P P
D D
Quantity (letters/month)

Q Q

The Effect of a Pay Raise on the Rent for Apartments in Delhi


Rent (Rs per month)

P P D D Q Q
apartments (units per month)

The Effect of the Release of Jurassic Park on the Market for Toy Dinosaurs
D = demand after release of movie Price

P P D

D Q Q

Toy Dinosaurs (units per month)

The Effect of a Credible Rumor on the Market for Apple Computers


D = demand after rumor of cheaper model soon to be released Price

P P D D Q Q
Apple Computers (units per month)

The Effect of the Increase in the Population of Potential Buyers


D = demand after increase in population Price

P P D D Q Q
Housing (units per month)

The Effect on the Skateboard Market of an Increase in the Price of Fiberglass


Price (Rs/skateboard)

S S

80 60
D

800 1000

Quantity (skateboards/month)

The Effect on the Market for New Houses of a Decline in Carpenters Wage Rates

Price (Rs1000/house)

S S

12 10
D

40 50

Quantity (houses/month)

Demand, Supply, and Market Price for Internet Time


1.55 1.50 1.45

Demand

Supply

Price per Hour

1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05

At a price of Rs1.20, 6 million hours of internet time will be offered for sale and an equal amount purchased

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Quantity (millions of hours)

Surplus of Internet Time


1.55

Price per Hour

1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05

Demand

At a price of Rs1.30, 7.8 million hours will be offered for sale but consumers are only willing to purchase hours Qs > Qd 4.2 million surplus of internet hours Supply

Surplus E

Rather than hold on to these hours sellers will offer to sell at lower prices with the result that more consumers enter the market price moves toward Rs1.20

0 1

4 5

7 8

9 10

11

12 13

Quantity (millions of hours)

Shortage of Internet Time


$1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05

Price per Hour

At a price of Rs1.10, buyers want to buy 8.5 million hours but sellers are willing to offer only 3.6 million hours Qd shortage >Q Some buyers will be willing to pay more with the result that the price will increase and sellers will increase the amount they offer for sale move toward Rs1.20

0 1

Shortag e 4 5 6 7

9 10

11

12 13

Quantity (millions of hours)

Equilibrium Price & Output Determination


What will happen to the equilibrium price & quantity of butter in each of the following cases? State whether the demand & supply or both have actually shifted & in which direction? a. a rise in the price of margarine a rise in demand for curd a rise in price of bread a rise in demand for bread an expected rise in the price of butter in future a tax on butter production the invention of a new but expensive process for removing all cholesterol from butter plus the passing of a law which states that all butter producers must use this process

House Prices: A case study in shifting demand curves Find out what has happened to house prices over the past three years. Attempt an explanation of what has happened

Case study
Adjusting to Oil Price Shocks Short run & long run demand & supply responses

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