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Price
Demand curve is downward sloping
3.00
2.50 E
2.00 D
1.50 C
1.00 B
0.50 A
0 5 10 15 20 25
Quantity demanded
The law of demand
0 Qsx
Equilibrium
Equilibrium is a situation in which opposing
forces balance each other. Equilibrium in a
market occurs when the price balances the
plans of buyers and sellers.
The equilibrium price is the price at which the
quantity demanded equals the quantity
supplied.
The equilibrium quantity is the quantity
bought and sold at the equilibrium price.
Price regulates buying and selling plans.
Price adjusts when plans don’t match.
Market Equilibrium
Px (Rs) QDx QSx Price (Px)
0.50 44 0 Sx
1.00 36 12 surplus
1.50 30 30 1.50
2.00 20 40 shortage Dx
2.50 10 50
0 30 Qx
Equilibrium means quantity demanded is equal to
quantity supplied at one price, so:
Qdx = Qsx Qdx = 42 - 8PX
42 – 8PX = 21 + 6PX Qdx = 42 – 8(1.5)
- 8PX – 6PX = 21 – 42 Qdx = 42 - 12
8PX + 6PX = -21 +42 Qdx = 30
14PX = 21
PX = 21/14
PX = 1.5
Shifts in demand and supply, and
equilibrium
If the market demand curve, the market supply
curve, or both shift, the equilibrium point will
change.
Problem: Draw various equilibrium situations:
Shifting demand curve keeping supply curve
unchanged.
Shifting supply curve keeping demand curve
unchanged.
Shifting both supply and demand curves.
See page 75 of Parkin for various combinations
Review Quiz
1. What is the equilibrium price of a good or service?
2. When surplus or shortage of a good occurs in the market?
3. What happens to the price when there is a surplus or
shortage of a good in the market?
4. Why is the equilibrium price the best deal available for
both buyers and sellers?
5. What is the law of demand and how do we illustrate it?
6. What is the law of supply and how do we illustrate it?
7. List all the influences on buying plans that change
demand, and for each influence, say whether it increases
or decreases demand.
Review Quiz
1. List all the influences on selling plans, and for
each influence, say whether it changes
supply.
2. From the following equation find the
equilibrium price and quantity of a good.
QDx = 800 – 2PD
QSx = 200 + 1PS
Problems
Solve problems (Parkin 8th edition, Page 81)
1, 2, 3, 5, 6, 7, and 8