Supply and Demand in Equilibrium: Microeconomics Study Notes

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Supply and Demand in Equilibrium

Introduction to Market Equilibrium

Market equilibrium is a fundamental concept in microeconomics, describing the point at which the quantity supplied equals the quantity demanded. This intersection determines the competitive equilibrium price and quantity in a market.

Equilibrium: The point where the market comes to rest, with no inherent tendency for price or quantity to change unless an external factor intervenes.
Competitive Equilibrium Price (PE): The price at which quantity supplied equals quantity demanded.
Competitive Equilibrium Quantity (QE): The quantity traded at the equilibrium price.

Example: If the market for widgets reaches equilibrium at and , this means that at a price of $5 widgets are bought and sold.

Shortage and Surplus

Markets may experience shortages or surpluses when the price is not at equilibrium.

Shortage: Occurs when buyers want more than suppliers provide at a given price. This situation is called excess demand.
Surplus: Occurs when suppliers provide more than consumers want at a given price. This situation is called excess supply.

Example: If the price of widgets is set below equilibrium, more buyers want widgets than sellers are willing to supply, resulting in a shortage.

Graphical Analysis of Equilibrium

Supply and Demand Curves

Supply and demand curves graphically represent the relationship between price and quantity supplied/demanded.

Demand Curve (D): Shows the quantity consumers are willing to buy at each price.
Supply Curve (S): Shows the quantity producers are willing to sell at each price.
Equilibrium Point (E): The intersection of supply and demand curves.

Equation: The equilibrium is found where .

Surplus: Price Above Equilibrium

When the market price is set above equilibrium, a surplus occurs.

At , for example, and .
Excess Supply: units.
Producers compete for buyers, often lowering prices to sell excess inventory.
As price falls, quantity demanded increases and quantity supplied decreases, moving the market toward equilibrium.

Example: If the price of widgets is $8$, but only 2 are demanded and 8 are supplied, there is a surplus of 6 widgets.

Shortage: Price Below Equilibrium

When the market price is set below equilibrium, a shortage occurs.

At , for example, and .
Excess Demand: units.
Buyers compete for limited goods, often bidding up prices.
As price rises, quantity demanded decreases and quantity supplied increases, moving the market toward equilibrium.

Example: If the price of widgets is $2$, but 8 are demanded and only 2 are supplied, there is a shortage of 6 widgets.

Market Adjustment Process

How Markets Move Toward Equilibrium

Markets naturally adjust toward equilibrium through changes in price.

Surplus: Sellers lower prices to clear excess inventory.
Shortage: Buyers bid up prices to obtain scarce goods.
These adjustments continue until the market reaches equilibrium.

Example: Concert tickets often sell out quickly if priced too low, leading to shortages and higher resale prices.

Shifts in Supply and Demand

Causes of Shifts

External events can shift supply or demand curves, changing equilibrium price and quantity.

Supply Shift: Caused by changes in production costs, technology, or number of sellers.
Demand Shift: Caused by changes in consumer preferences, income, or number of buyers.

Example: A technological breakthrough (like fracking) increases oil supply, shifting the supply curve right and lowering prices.

Analyzing Market Changes: Three-Step Method

To predict market outcomes, use the following steps:

Determine whether the event affects supply, demand, or both.
Identify the direction of the shift (leftward or rightward).
Use a supply-demand diagram to analyze changes in equilibrium price and quantity.

Example: If a tech company moves to Boulder, demand for housing increases (rightward shift), raising both equilibrium price and quantity.

Tabular Analysis: Market Schedules

Market Supply and Demand Schedules

Market schedules list quantities supplied and demanded at various prices, helping to identify equilibrium.

Price ($)	Quantity Demanded	Quantity Supplied
0	1200	0
3	900	300
6	600	600
9	300	600

Equilibrium: At , quantity demanded equals quantity supplied (600 cases).

Summary of Key Concepts

Markets move toward equilibrium where quantity supplied equals quantity demanded.
Surpluses cause prices to fall; shortages cause prices to rise.
Shifts in supply or demand change equilibrium price and quantity.
Use the three-step method to analyze market changes.

Additional info: These notes expand on graphical and tabular examples, providing context for real-world applications such as housing markets, concert tickets, and commodity prices.