1. S2M7
Market Equilibrium

2. Supply, Demand, and Equilibrium
Equilibrium occurs when no one could be made better off doing something different.
Because the two lines are equal in length in the picture on the right, no shopper would be better off by switching to the other. Thus, there is an equilibrium.

3. Supply, Demand, and Equilibrium
A competitive market is in equilibrium where the quantity demanded equals the quantity supplied.
The corresponding price and quantity is called the equilibrium price and the equilibrium quantity.

4. Supply, Demand, and Equilibrium
The equilibrium price is also known as the market-clearing price.
The equilibrium price “clears the market” for a good or service because it ensures that every buyer willing to pay it will find a seller willing to sell at that price—and vice versa.

5. Finding the Equilibrium Price and Quantity
Price of cotton
(per pound)
Market equilibrium occurs where the supply curve and the demand curve intersect.
Supply
$2.00
1.75
1.50
1.25 E
Equilibrium price
Point E identifies the equilibrium price and equilibrium quantity.
1.00
Equilibrium
0.75
0.50
Demand 7 10 13 15 17
Equilibrium quantity
Quantity of cotton
(billions of pounds)

6. There Is One Market Price in a Competitive Market
When the same goods are sold for different prices—such as in the market for souvenirs in different “tourist traps”—buyers either lack information, or the market isn’t fully competitive.
Took some liberties with this one—double-check.
In a competitive market, however, all sellers receive (and all buyers pay) approximately the same price—called the market price.

7. Price Above Equilibrium Creates a Surplus
Price of cotton
(per pound)
A price above equilibrium creates a surplus.
Supply
$2.00
Surplus
1.75
1.50
In a surplus, quantity supplied…
1.25
1.00 E
0.75
…exceeds quantity demanded.
0.50
Demand 7
8.1 10
11.2 13 15 17
Quantity of cotton (billions of pounds)
Quantity demanded
Quantity supplied

8. Price Below Equilibrium Creates a Shortage
Price of cotton
(per pound)
A price below equilibrium creates a shortage.
Supply
$2.00
1.75
1.50
In a shortage, quantity demanded…
1.25 E
1.00
0.75
…exceeds quantity supplied.
Shortage
0.50
Demand 7
9.1 10
11.5 13 15 17
Quantity of cotton (billions of pounds)
Quantity supplied
Quantity demanded

9. Equilibrium & Shifts of the Demand Curve
Price of cotton
An increase in demand is shown in the figure on the right.
Supply E2 P2
Price rises E1
It leads to a movement along the supply curve… P1 D2
… causing the equilibrium price and quantity to increase. D1
Quantity rises Q Q2
Quantity of cotton

10. Equilibrium & Shifts of the Supply Curve
Price of cotton
A decrease in supply is shown in the figure on the right. S2 S1 E2 P2
It leads to a movement along the demand curve…
Price rises P1 E1
… causing the equilibrium price to increase…
Demand
… and the equilibrium quantity to decrease. Q2 Q1
Quantity of cotton
Quantity falls

11. Simultaneous Shifts of Supply & Demand

12. Simultaneous Shifts of Supply & Demand
Price: unknown
Quantity: increases
Price: increases
Quantity: unknown
Demand ↓
Price: decreases
Quantity: decreases
When changes to price or quantity are unknown, the answer depends on whether the shift of supply or demand was greater.

13. Summary and Review 1) What is the market-clearing price called?
The equilibrium price
2) Where is the equilibrium price found?
Where quantity demanded equals quantity supplied.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
3) Where is the equilibrium quantity found?
Where quantity demanded equals quantity supplied.

14. Summary and Review
4) What results when price is above its equilibrium level?
A surplus
5) What is a surplus?
When quantity supplied exceeds quantity demanded.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
6) What is the result of a surplus in a competitive market?
Price is eventually pushed back down to its equilibrium level.

15. Summary and Review
7) What results when price is below its equilibrium level?
A shortage
8) What is a shortage?
When quantity demanded exceeds quantity supplied.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
9) What is the result of a shortage in a competitive market?
Price is eventually pushed back up to its equilibrium level.

16. Summary and Review 10) Where does equilibrium move when demand shifts?
It moves to a new demand curve along the supply curve.
11) Where does equilibrium move when supply shifts?
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
It moves to a new supply curve along the demand curve.

17. Summary and Review
12) If demand alone decreases, what happens to price and quantity?
Equilibrium price and quantity both increase.
13) If supply and demand increase, what happens to price and quantity?
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
Quantity increases; change in price is unknown.

18. Summary and Review
14) If only supply decreases, what happens to price and quantity?
Equilibrium price increases; equilibrium quantity decreases.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.

19. Walkthrough: Free-Response Question 1
1. Draw a correctly labeled graph showing the market for tomatoes in equilibrium. Label the equilibrium price “PE” and the equilibrium quantity “QE.” On your graph, draw a horizontal line indicating a price, labeled “PC”, that would lead to a shortage of tomatoes. Label the size of the shortage on your graph. (6 points)
1 point: Graph with the vertical axis labeled “Price” or “P” and the horizontal axis labeled “Quantity” or “Q”.
1 point: Price line at a price “PC” below the equilibrium price.
1 point: Correct indication of the shortage, which is the horizontal distance between the quantity demanded and the quantity supplied at PC.
1 point: Downward-sloping demand curve labeled “Demand” or “D”.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
1 point: Upward-sloping supply curve labeled “Supply” or “S”.
1 point: Equilibrium price “PE” labeled on the vertical axis and quantity “QE” labeled on the horizontal axis at the intersection of the supply and demand curves.