Navigation
Discovering the 'sweet spot' where buyers and sellers agree on price and quantity.
Have you ever wondered why a slice of pizza costs exactly what it does? It is not a random guess—it is a delicate balancing act where buyers and sellers finally agree on a 'secret handshake' price.
In a market, buyers want the lowest price possible to save money, while sellers want the highest price possible to make a profit. Market Equilibrium is the 'sweet spot' where these two groups meet in the middle. At this point, the Quantity Demanded () is exactly equal to the Quantity Supplied (). This means every buyer who wants the product at that price can find a seller, and every seller who wants to sell at that price can find a buyer. The price where this happens is called the Equilibrium Price, and the amount sold is the Equilibrium Quantity.
Quick Check
What is the mathematical relationship between Quantity Demanded () and Quantity Supplied () at equilibrium?
Answer
At equilibrium, .
When we look at a graph, the Demand Curve slopes downward because people buy more when prices are low. The Supply Curve slopes upward because businesses want to sell more when prices are high. The point where these two lines cross is the Equilibrium Point. If you look at the -axis (Price) from this point, you find the equilibrium price (). If you look down at the -axis (Quantity), you find the equilibrium quantity (). At any price above this point, sellers want to sell more than buyers want to buy, creating a surplus. At any price below this point, buyers want more than is available, creating a shortage.
Let's find the equilibrium for a cup of lemonade using a graph.
1. Look at the graph where the Demand line and Supply line intersect.
2. Move your finger horizontally to the left to the Price axis. If it hits , then $P^* = \$2.0050Q^* = 50\ for cups.
Sometimes you don't have a graph; you have a Market Schedule, which is just a table of numbers. To find the equilibrium here, you simply look for the row where the number in the 'Quantity Demanded' column matches the number in the 'Quantity Supplied' column. This row tells you the price the market will naturally settle on. If , the price will likely rise. If , the price will likely fall until they are equal.
Find the equilibrium price and quantity from this table:
| Price | | |
|-------|-------|-------|
| $\$4010020\ | | |
| $\$806060\ | | |
1. Compare and at each price.
2. At $\$80Q_d = 60Q_s = 60\ and the Equilibrium Quantity is pairs.
Quick Check
If is 100 and is 150, is the market in equilibrium? If not, what is this called?
Answer
No, it is not in equilibrium; this is called a surplus.
A new game is released. At $\$60Q_d = 500Q_s = 200\, and . At $\$80Q_d = 350Q_s = 350$.
1. Identify the shortage: At $\$60500 - 200 = 300\, .
3. Conclusion: The market will move toward $\$80$ to clear the shortage.
What happens to the price if there is a 'surplus' in the market?
At the equilibrium point on a graph, what is true?
If the price of a chocolate bar is below the equilibrium price, a shortage will occur.
Review Tomorrow
In 24 hours, try to sketch a supply and demand graph from memory and label the equilibrium point, price, and quantity.
Practice Activity
Next time you are at a store and see a 'Clearance' sign, ask yourself: Was the original price above or below the equilibrium price? (Hint: Clearance usually means there was a surplus!)