Equilibrium (Prices)

Supply and Demand at Work

⚫ Supply and Demand Schedule can be

combined into one chart.

Price per Widget
($)

Quantity
Demanded of
Widget per day

Quantity
Supplied of
Widget per day

$5

2

10

$4

4

8

$3

6

6

$2

8

4

$1

10

2

Supply and Demand at Work

Supply and Demand at Work

•
A surplus is the amount by which
the quantity supplied is higher than
the quantity demanded.
–
A surplus signals that the price is too
high.

–
At that price, consumers will not buy
all of the product that suppliers are
willing to supply.

–
In a competitive market, a surplus will
not last. Sellers will lower their price to
sell their goods.

Supply and Demand at Work

•At $4, Quantity demanded
will be 4 Widgets

•At $4, Quantity supplied
will be 8 Widgets.

•At $4, there will be a
surplus of 4 Widgets.

Surplus

•Suppose that the price in
the Widget market is $4.

Supply and Demand at Work

⚫ A shortage is the amount by which the

quantity demanded is higher than the
quantity supplied

⚫ A shortage signals that the price is too

low.

⚫ At that price, suppliers will not supply all

of the product that consumers are willing
to buy.

⚫ In a competitive market, a shortage will

not last. Sellers will raise their price.

Supply and Demand at Work

•Suppose that the price in
the Widget market is $2.

•At $2, Quantity supplied
will be 4 Widgets

•At $2, Quantity demanded
will be 8 Widgets.

•At $2, there will be a
shortage of 4 Widgets.

Shortage

Supply and Demand at Work

When operating without
restriction, our market economy
eliminates shortages and surpluses.
–

Over time, a surplus forces the price
down and a shortage forces the price up
until supply and demand are balanced.

–

The point where they achieve balance is
the equilibrium price. At this price,
neither a surplus nor a shortage exists.

•
Once the market price reaches
equilibrium, it tends to stay there until
either supply or demand changes.
–

When that happens, a temporary surplus
or shortage occurs until the price adjusts
to reach a new equilibrium price.

Supply and Demand at Work

•Suppose that the price in
the Widget market is $3.

•At $3, Quantity supplied
will be 6 Widgets

•At $3, Quantity demanded
will be 6 Widgets.

•At $3, there will be neither
a surplus or a shortage.