EPF Lesson 3.03 - Equilibrium

EPF Lesson 3.03:

Equilibrium

By Anasia Napper

Equilibrium

(3.03a)​

By Anasia Napper

In reality, gas prices (and other prices) are determined by the interaction of demand and supply in the market!

Introduction

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Content​

We can put both sides of the market, demand and supply, together to represent a product market and determine the equilibrium price and quantity. 

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The concept of equilibrium is not unique to economics—you can hear about equilibrium in many different contexts.

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Content​

​In general, equilibrium means that opposing forces are equal, there is balance, or there is no tendency for change. Equilibrium price and quantity in a market are the price and quantity that result when there is balance between quantity demanded and quantity supplied and there is no tendency for them to change. Markets will stay in equilibrium unless and until something (like a determinant of demand or supply) changes!

Lesson 3.03 Video 1.mp4 - Google Drive

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Lesson 3.03 Video 2.mp4 - Google Drive

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Multiple Choice

When willingness to buy coincides with _____, the market is in equilibrium.

• willingness to consume

• willingness to sell

Multiple Choice

At equilibrium, _____ is equal to quantity supplied.

• quantity demanded

• quantity realized

Multiple Choice

Consider the supply and demand schedules for toothpaste.

The equilibrium price for toothpaste is:

• $2

• $3

• $4

• $5

Multiple Choice

At an equilibrium price, the market is _____.

• stable

• unstable

Multiple Choice

At a disequilibrium where quantity supplied is greater than quantity demanded, there is a _____ in the market.

• surplus

• shortage

Multiple Choice

At a disequilibrium where a shortage exists, quantity demanded _____ quantity supplied.

• is greater than

• is less than

Multiple Choice

When a shortage exists, buyers will _____ the price of the product and the market will move toward equilibrium.

• bid up

• bid down

Multiple Choice

When a surplus exists, sellers will _____ the price of the product and the market will move toward equilibrium.

• increase

• decrease

So... what if market price is not at equilibrium?

What if Market Price is Not at Equilibrium?

If the price in a market is above equilibrium, the quantity demanded will be less than the quantity supplied (producers like the higher price, but consumers do not!). When a higher quantity is supplied than is demanded, some goods will go unsold. The unsold quantity is called a surplus and it is equal to the quantity supplied minus the quantity demanded.  A surplus will cause producers to lower their price to sell the surplus of goods. Price will decrease until the surplus is eliminated at the equilibrium price, where quantity supplied is equal to quantity demanded.

What if Market Price is Not at Equilibrium?

If the price in a market is below equilibrium, the quantity demanded will be greater than the quantity supplied (consumers like the lower price, but producers do not!). When a higher quantity is demanded than is supplied, some consumers will not get to purchase the good. The amount that consumers want to purchase that is not available is called a shortage and it is equal to the quantity demanded minus the quantity supplied. A shortage will cause producers to raise their price to eliminate the shortage. Price will increase until the shortage is eliminated at the equilibrium price, where quantity supplied is equal to quantity demanded.

Check Yourself

Let's return to our popcorn example. The graph shows the market for popcorn at the high school performance of Into the Woods. Refer to the graph to answer the questions that follow.

Fill in the Blanks

Fill in the Blanks

Multiple Choice

At equilibrium in this market, quantity supplied is equal to quantity demanded, and price and quantity will not change.

• True

• False

Equilibrium in the demand and supply model occurs at the price and quantity where the supply and demand curves cross.

At equilibrium in the supply and demand model:

• Quantity supplied = Quantity demanded

• The supply and demand curves intersect

• There is no surplus or shortage

• There is no tendency for price to change

Equilibrium in the Supply and Demand Model

Equilibrium in general occurs when there is balance, opposing forces are equal, or there is no tendency for change.

Equilibrium

Review

A shortage occurs when quantity demanded exceeds quantity supplied (Qd > Qs).

Shortage

A surplus occurs when quantity supplied exceeds quantity demanded (Qs > Qd).​

Surplus

Review

Open Ended

THINK ABOUT IT:

Equilibrium is a term that is used in many places outside economics. What is the general definition of equilibrium? What does it mean to "lose your equilibrium" when you are walking down the hall?

How Markets Move to Equilibrium

(3.03b)​

By Anasia Napper

Surpluses and shortages DO have an effect on markets!

Introduction

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Content

The previous lesson looked at finding equilibrium price and quantity in a market and on a demand and supply graph. In this lesson, we look more closely at the signals that cause producers to change their prices and how a market moves toward equilibrium.

Lesson 3.03 Video 3.mp4 - Google Drive

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Multiple Choice

Price determines Q_S and Q_D.

• True

• False

Multiple Choice

Demand in a market determines the price.

• True

• False

Multiple Choice

Surplus puts upward pressure on price.

• True

• False

Multiple Choice

Shortage puts upward pressure on price.

• True

• False

Multiple Choice

In a shortage, as price increases, suppliers decrease the quantity supplied.

• True

• False

Prices Above Equilibrium

When the price in a market is above equilibrium, the quantity demanded decreases because consumers want to buy less at a higher price. The quantity supplied increases because producers want to sell more at the higher price. When the quantity supplied is greater than the quantity demanded, there will be a surplus in the market. When producers see the surplus, and see that their inventories are increasing because they are not selling all that they produce, they will reduce price in order to increase quantity demanded, sell more, and eliminate the surplus. Price will decrease until the surplus is gone—at the equilibrium price. Prices above equilibrium cause surpluses to signal producers to lower price.

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Prices Below Equilibrium

When the price in a market is below equilibrium, the quantity demanded increases because consumers want to buy more at a lower price. The quantity supplied decreases because producers want to sell less at the lower price. When the quantity supplied is less than the quantity demanded, there will be a shortage in the market. When producers see the shortage, and see that their inventories are decreasing because quantity demanded is higher than quantity supplied, they will raise their price in order to decrease quantity demanded, eliminate the shortage, and earn higher profits. Price will increase until the shortage is gone—at the equilibrium price. Prices below equilibrium cause shortages to signal producers to raise price.

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Remember:

At equilibrium, there is no surplus or shortage and therefore no signal to producers to change their price.​

Let's return to our popcorn example. The graph shows the market for popcorn at the high school performance of Into the Woods. Refer to the graph to complete the handout activity.

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Check Yourself

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Content (cont.)

Sometimes producers in a market are prevented from moving price to equilibrium; for example, when the government establishes a price ceilings or a price floor. A government might establish a price ceiling or a price floor if the government determines that for some reason the market price does not meet a desired goal; for example, fairness.

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Content (cont.)

​A price ceiling is a maximum legal price established by the government. A price ceiling is set below the equilibrium price and prevents the market price from increasing.

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A price floor is a minimum legal price established by the government. A price floor is set above equilibrium price and prevents the price from decreasing.

Multiple Choice

Price ceilings and floors are _____ price controls in markets.

• government-suggested

• government-imposed

Multiple Choice

A price ceiling is a price _____ the equilibrium price, and it creates a _____.

• above; surplus

• above; shortage

• below; surplus

• below; shortage

Multiple Choice

A price floor is a price _____ the equilibrium price, and it creates a _____.

• above; surplus

• below; surplus

• above; shortage

• below; shortage

Multiple Choice

A _____ is intended to help consumers acquire necessary products.

• price ceiling

• price floor

Multiple Choice

A _____ is intended to help suppliers when they are not adequately rewarded in a market.

• price ceiling

• price floor

Multiple Choice

Minimum wage is an example of a _____.

• price ceiling

• price floor

Review (3.03b)

• Markets move to equilibrium unless something (like a price ceiling or floor) prevents it.

• ​Shortages cause prices to rise toward equilibrium.

• ​Surpluses cause prices to fall toward equilibrium.

• ​At equilibrium, quantity supplied equals quantity demanded, there is no surplus or shortage, and there is no signal for price to change.

Review (3.03b)

• A price ceiling is a maximum price set by the government below equilibrium.

• A price floor is a minimum price set by the government above equilibrium.

End of Lesson

Don't forget to take the Comprehension Check!