Equilibrium The “EXCITING” intersection of supply and demand

What is the Equilibrium point? Equilibrium is where the quantity of the product that consumers are willing to buy over a period of time equals the quantity producers are willing to supply. Graphically, this is the intersection of supply and demand curves. This price, once achieved, tends to persist.

The “Psychology” of the Equilibrium If a product comes on the market and does not sell, the producer realizes, the price will likely be slightly adjusted to increase, creating more profit for the producer. There is a human element to supply and demand and by casting your votes (in purchasing dollars), you are sending a message to the producer/supplier that the price is acceptable or unacceptable.

Equilibrium Point

Surplus When the quantity demanded falls short of the quantity supplied and extra product exists (this surplus pushes the price down to the equilibrium level).

Example of a Surplus An example of a surplus occurred in our recent past with farmers in Canada, who have not received government support to keep their prices competitive on the world market. Unfortunately, hog farmers could not even afford to feed their pigs in the late 1990's and rather than continue to feed them, they were killing them. The agricultural industry in Canada continues to be in jeopardy without government support to farmers to price their goods competitively on the world market. Additionally, Canada was once one of the lead exporters of wheat in the world. Because of the lack of assistance from the government, farmers have not been able to remain competitive in this industry. Other countries support their agricultural trade with generous subsidies (this will be covered in a later unit) to allow farmers to remain competitive.

Graphical Representation of Surplus and Shortage

Summary Demand and supply are brought into balance by the effects of changes in price. If supply exceeds demand in any market (a surplus), the price will fall. This will lead to a rise in the quantity demanded and the quantity supplied. If however, demand exceeds supply in any market (think of a hot new product) a shortage exists. The price will rise and the quantity demanded will fall. In either case, the adjustment of price will ensure that demand and supply are brought into equilibrium, with any shortage or surplus being eliminated.