1. Market Equilibrium: Putting Supply & Demand Together
IB Economics

2. Equilibrium
Equilibrium Price: When the market price the producers are willing to supply is identical with the price the consumers are willing and able to buy. a.k.a. The market-clearing price
Equilibrium Quantity: The market quantity that producers are willing and able to supply that is identical to the quantity the consumers are willing and able to purchase (demand)

3. Equilibrium Quantity & Price6
$10 8 60 80
100 D S
What happens if the price is $10?
Quantity supplied is 100, and the quantity demanded is 60.
There is excess supply: A Surplus!

4. Equilibrium Quantity & PriceS
$10
Price 8 6 D 60 80
100
Quantity
What happens if the price is $6?
Quantity demanded is 100, and the quantity supplied is 60.
There is excess demand: A Shortage!

5. Equilibrium Quantity & PriceS
$10
Price 8 6 D 60 80
100
Quantity
What happens if the price is $8?
The quantity that producers want to sell is exactly equal to the quantity that buyers want to buy.
The market is in Equilibrium!!

6. Changes in Supply, Demand, & Equilibrium
Determinants of demand:
Tastes, Income, variations of Prices of related goods & services, Population, Expectations
Determinants of supply:
Resource prices, Technology, Government action, Expectations, Number of Suppliers, Weather
What effect will such changes have on equilibrium?

7. Increase in Demand S
$10 8
Price 6 D2 D1 60 80
100
Quantity
Increases BOTH equilibrium price and equilibrium quantity

8. Decrease in Demand S
$10 8
Price 6 D1 D2 60 80
100
Quantity
Decreases BOTH equilibrium price and equilibrium quantity

9. Increase in Supply S1 S2
$10 8
Price D 6 60 80
100
Quantity
Decreases equilibrium price & Increases equilibrium quantity

10. Decrease in Supply S2
$10 S1 8
Price D 6 60 80
100
Quantity
Increases equilibrium price & Decreases equilibrium quantity

11. You Guessed it… Time to Check for Understanding
Price (per bushel)
Bushels of corn (thousands per week) $5 2 12 $3 7 S D
Demand curve D is downsloping because:
Producers offer less of a product for sale as the price of the product falls
Lower prices of a product create income & substitution effects that lead consumers to purchase more of it
The larger the number of buyers in a market, the lower the product price
Price & quantity demanded are directly (positively) related

12. You Guessed it… Time to Check for Understanding
Price (per bushel)
Bushels of corn (thousands per week) $5 2 12 $3 7 S D
Supply curve S:
Reflects an inverse (negative) relationship between price and quantity supplied
Reflects a direct (positive) relationship between price and quantity supplied
Depicts the collective behavior of buyers in this market
Shows that producers will offer more of a product for sale at a low price than at a high product price

13. You Guessed it… Time to Check for Understanding
Price (per bushel)
Bushels of corn (thousands per week) $5 2 12 $3 7 S D
At the $3 price:
Quantity supplied exceeds quantity demanded
Quantity demanded exceeds quantity supplied
The product is abundant and a surplus exists
There is no pressure on price to rise or fall

14. You Guessed it… Time to Check for Understanding
Price (per bushel)
Bushels of corn (thousands per week) $5 2 12 $3 7 S D
At the $5 price in this market:
There will be a shortage of 10,000 units
There will be a surplus of 10,000 units
Quantity demanded will be 12,000 units
Quantity demanded will equal quantity supplied

15. WOW! That’s Some Supply and Demand!