Equilibrium

EQUILIBRIUM

LET’S CREATE A MARKET

IN OUR CLASSROOMYou need a pencil and a

piece of scrap paper.

THE PRODUCT:“Econ Class Snack Pack”

Glass of Coca-Cola

Mini Brownie

Fruit Shish-Kabob

STEP ONE:How much money

are you willing to pay for an “Econ Class Snack Pack”?

!

Write the amount on a slip of paper.

STEP TWO:I will create a demand schedule on the board based on the prices you

have all just proposed.Price Quantity Demanded

? ?

? ?

? ?

STEP THREE:Think like the supplier.

What price do you think you should sell this product at?

!

Your goal: sell at the highest price and the highest quantity you

possibly can.

HINTS:You can sell at a very high price and

produce a large quantity…but how many people will be willing to buy the product? Will you have products that go unsold?

You can sell at the lowest price and try to reach more customers, but remember

that it cost you something to produce the product. You need to cover the costs of

your own production.

Qs

PIn an ideal world, sellers want to sell large quantities at high prices so they make

large profits. !

But, what if the demand is lower than the quantity they want to

supply?

Qs

P

Qd

In an ideal world, sellers want to sell large quantities at high prices so they make

large profits. !

But, what if the demand is lower than the quantity they want to

supply?

Qd

P

If I am a seller, I want to sell at a price where:

!• People are demanding as

much as I choose to produce. Not enough demand means I have

products that go unsold. !

• There is not too much demand, either. Too much demand means I could be

raising my prices. !

• The price is high enough to cover the cost of my production so I make a

profit.

Qs

EQUILIBRIUM PRICE:The price where quantity

demanded (Qd) is equal to quantity supplied (Qs).

Q

P

We indicate equilibrium

price with “P” and a “star”

EQUILIBRIUM QUANTITY:The quantity (Q) at which quantity

demanded (Qd) and quantity supplied (Qs) are equal at a certain price (P).

Q

P

We indicate equilibrium

quantity with “Q” and a

“star”

EQUILIBRIUM STATE:The combination of price (P) and quantity (Q) where there is no

economic pressure from extra demand or extra supply.

Q

P

EQUILIBRIUM STATE…… is the state in which BOTH buyers and sellers are receiving a desirable

outcome from the sale.

Q

P

DISEQUILIBRIUM STATE:When the market is outside of

equilibrium. In other words, when there is a surplus or shortage of goods.

Qs

P

Qd Qd

P

Qs

SURPLUS:When at a given price, quantity supplied is greater than quantity

demanded.

Qs > QdWe have

20 phones for sale at 100$ each!

Only 10 of us are willing to pay that price for a

phone.

Sellers Buyers

SURPLUS:When at a given price, quantity supplied is greater than quantity

demanded.Who does a surplus

hurt the most? Benefit the most?

We have 20 phones for sale at 100$ each!

Only 10 of us are willing to pay that price for a

phone.

Sellers Buyers

SURPLUS:

Qs > Qd

Qs

P

Qd

Notice how Qs is at a higher quantity than Qd. This is a

visualization of a surplus.

At a given price, draw a straight horizontal line that intersects

the demand curve and the supply

curve.

SHORTAGE:When at a given price, quantity

demanded is greater than quantity supplied.

Qs < QdWe have

20 phones for sale at 100$ each!

There are 30 of us willing to

buy a phone at that price!

Sellers Buyers

SHORTAGE:When at a given price, quantity

demanded is greater than quantity supplied.

We have 20 phones for sale at 100$ each!

There are 30 of us willing to

buy a phone at that price!

Sellers Buyers

Who does a shortage hurt the most?

Benefit the most?

SHORTAGE:

Qs < Qd

Now, Qd is higher than Qs. This indicates a shortage of goods.

Our straight line now intersects supply before it intersects

demand.

Qd

P

Qs

EQUILIBRIUM STATE…… is the state in which BOTH buyers and sellers are receiving a desirable

outcome from the sale.

Q

P

DISEQUILIBRIUM STATE:When there is a surplus or a shortage, either

buyers or sellers are at a disadvantage.

Qs

P

Qd Qd

P

Qs

Surplus - buyers benefit most Shortage - sellers benefit most

DISEQUILIBRIUM STATE:In other words, in a surplus, sellers are not maximizing their profits, and in a shortage,

buyers are not maximizing their utility.

Qs

P

Qd Qd

P

Qs

Surplus - buyers benefit most Shortage - sellers benefit most