Equilibrium

Definition Equilibrium: price and quantity where the supply of a good and the demand for that good are equal (AKA Market Clearing Price) Example: Ms. Yeomans wants to buy 1 Starbucks coffee at $4.75 and Starbucks wants to sell her 1 coffee at $4.75

P S P* Equilibrium D Q Q*

Changes to Equilibrium If demand or supply change, equilibrium changes If Demand increases, equilibrium price and quantity increase If Demand decreases, equilibrium price and quantity decrease If Supply increases, equilibrium price decreases and quantity increases If Supply increases, equilibrium price increases and quantity decreases

Demand Increase P S P* Equilibrium D2 D Q Q*

Demand Decrease P S P* Equilibrium D D2 Q Q*

Supply Increase P S S2 P* Equilibrium D Q Q*

Supply Decrease S2 P S P* Equilibrium D Q Q*