SkarpSkarp

Chapter 4 of 5

Finding Market Equilibrium

At one special point, buyers' plans meet sellers' plans. That intersection explains how markets coordinate decisions—and what happens when the price moves away from balance.

12 min readen

1. The Market-Clearing Point

Buyers' Plans Meet Sellers' Plans

Market equilibrium is the point at which planned quantity demanded equals planned quantity supplied. Buyers and sellers can carry out compatible plans at one price and one quantity.

Two Results at One Point

The equilibrium price is the market-clearing price. The equilibrium quantity is the amount exchanged at that price. Neither term means that every individual buyer or seller is identical.

Reading the Standard Graph

Place price on the vertical axis and quantity on the horizontal axis. The downward-sloping demand curve and upward-sloping supply curve intersect at equilibrium.

2. Read a Market Schedule

Quick Sort: Where Is the Balance?

A campus coffee shop has the following daily plans.

| Price per coffee | Quantity demanded | Quantity supplied |

|---|---:|---:|

| $2 | 90 | 30 |

| $3 | 70 | 50 |

| $4 | 50 | 50 |

| $5 | 30 | 70 |

  1. Find the row where quantity demanded equals quantity supplied.
  2. Identify the equilibrium price and equilibrium quantity.
  3. At $3, decide whether buyers or sellers are unable to carry out all their plans.

Check yourself: Equilibrium is at $4 and 50 coffees. At $3, quantity demanded exceeds quantity supplied, so some buyers who wish to purchase coffee cannot do so at that price.

3. Locate Equilibrium on a Graph

Graph Method: Find the Intersection

Imagine a graph for reusable water bottles.

  • The demand curve starts high on the price axis and slopes down to the right.
  • The supply curve starts lower and slopes up to the right.
  • They cross at point E, where price is $12 and quantity is 400 bottles per week.

To locate equilibrium:

  1. Find where the demand and supply curves cross.
  2. Move horizontally from point E to the price axis: this gives the equilibrium price, $12.
  3. Move vertically from point E to the quantity axis: this gives the equilibrium quantity, 400 bottles.
  4. Label the point `(P, Q) = ($12, 400)`.

The asterisk means

4. Off-Equilibrium Prices: Shortages and Surpluses

Below Equilibrium: Shortage

When price is below equilibrium, quantity demanded exceeds quantity supplied. This gap is a shortage or excess demand: `Qd - Qs`.

Above Equilibrium: Surplus

When price is above equilibrium, quantity supplied exceeds quantity demanded. This gap is a surplus or excess supply: `Qs - Qd`.

Plans, Not Just Inventory

Shortage and surplus compare planned buying and selling at one price. They do not automatically tell us how quickly shelves empty or whether firms have already produced goods.

5. Why Prices Tend to Adjust

Shortage Creates Upward Pressure

At $3, buyers plan to buy 70 coffees while sellers offer 50. The shortage is 20. Unmet buyers and strong sales create upward pressure on the price.

Surplus Creates Downward Pressure

At $5, sellers offer 70 coffees but buyers plan to buy 30. The surplus is 40. Unsold output creates downward pressure on the price.

A Tendency, Not Magic

Markets do not always adjust instantly. Contracts, regulation, search costs, menu costs, and incomplete information can slow price changes or redirect adjustment into queues and other mechanisms.

6. Calculate Equilibrium with Linear Equations

Start with Both Equations

For smoothies, demand is `Qd = 100 - 5P` and supply is `Qs = 20 + 3P`. At equilibrium, the two planned quantities must be equal.

Solve for Equilibrium Price

Set `100 - 5P = 20 + 3P`. Rearranging gives `80 = 8P`, so the equilibrium price is `P = 10`.

Find and Check Quantity

Substitute `P = 10` into either equation: `Q = 100 - 5(10) = 50`. Supply also equals 50, so the result is ($10, 50 smoothies).

7. Your Turn: Diagnose the Market

Apply the Equation Method

For a student parking market, suppose:

```text

Qd = 240 - 10P

Qs = 40 + 10P

```

  1. Set `Qd = Qs` and solve for equilibrium price.
  2. Substitute that price into either equation to find equilibrium quantity.
  3. At `P = $8`, calculate `Qd` and `Qs`. Is there a shortage or surplus? By how many spaces?

Worked check:

```text

240 - 10P = 40 + 10P

200 = 20P

P = 10

Q = 140

```

At $8, `Qd = 160` and `Qs = 120`, producing a shortage of 40 spaces. The market experiences upward pressure on price, unless another rule constrains price adjustment.

8. Check Your Calculation

One-Minute Check

A market has `Qd = 90 - 2P` and `Qs = 30 + P`. What is the equilibrium?

A market has Qd = 90 - 2P and Qs = 30 + P. What is the equilibrium?

  1. P = $20 and Q = 50
  2. P = $30 and Q = 30
  3. P = $20 and Q = 30
  4. P = $50 and Q = 20
Show Answer

Answer: A) P = $20 and Q = 50

Set demand equal to supply: 90 - 2P = 30 + P. Then 60 = 3P, so P = 20. Substitution gives Q = 90 - 2(20) = 50, which also equals 30 + 20.

9. Connect Equilibrium to Shifts

Equilibrium Can Move

Equilibrium changes when demand or supply shifts. For example, greater consumer interest shifts demand right; the market then settles at a new intersection.

Typical Comparative Statics

Demand increase: equilibrium price and quantity generally rise. Supply increase: equilibrium price generally falls while equilibrium quantity rises, all else equal.

Shift vs. Movement Along

A change in the good's own price causes movement along existing curves. Changes in income, tastes, input costs, or technology can shift an entire curve.

10. Key Terms Review

Flip and Recall

Use each card to state the definition before flipping it.

Market equilibrium
A situation in which planned quantity demanded equals planned quantity supplied.
Equilibrium price
The price at which quantity demanded equals quantity supplied; also called the market-clearing price.
Equilibrium quantity
The quantity bought and sold at the equilibrium price.
Shortage
Excess demand: quantity demanded exceeds quantity supplied at a given price.
Surplus
Excess supply: quantity supplied exceeds quantity demanded at a given price.
Price adjustment
The tendency for shortages to create upward pressure and surpluses to create downward pressure on price.

11. Final Scenario

Put It All Together

The equilibrium price of concert tickets is $50. At a regulated price of $35, quantity demanded is 9,000 tickets and quantity supplied is 6,000 tickets. Which statement is most accurate?

At $35, quantity demanded is 9,000 tickets and quantity supplied is 6,000 tickets. Which statement is most accurate?

  1. There is a surplus of 3,000 tickets and downward pressure on price.
  2. There is a shortage of 3,000 tickets; without the regulation, this would create upward pressure on price.
  3. The market is in equilibrium because tickets are being sold.
  4. There is a shortage of 15,000 tickets because $35 is below $50.
Show Answer

Answer: B) There is a shortage of 3,000 tickets; without the regulation, this would create upward pressure on price.

At $35, Qd - Qs = 9,000 - 6,000 = 3,000, so there is a shortage. A binding rule that prevents price from rising can keep the shortage from being eliminated through price adjustment; allocation may instead occur through queues, lotteries, or resale.

Key Terms

shift
A movement of an entire demand or supply curve caused by a non-price determinant.
surplus
A condition in which quantity supplied is greater than quantity demanded at a given price.
shortage
A condition in which quantity demanded is greater than quantity supplied at a given price.
excess demand
Another name for a shortage.
excess supply
Another name for a surplus.
price adjustment
The process or tendency by which shortage and surplus pressures move price toward equilibrium.
equilibrium price
The price at which the market clears because quantity demanded equals quantity supplied.
market equilibrium
The condition in which planned quantity demanded equals planned quantity supplied.
equilibrium quantity
The amount exchanged when the market is in equilibrium.
market-clearing price
Another name for equilibrium price.
movement along a curve
A change in quantity demanded or quantity supplied caused by a change in the good's own price.

Finished reading?

Test your understanding with a custom practice exam on this chapter.

Test yourself