SAD - The Market Lesson

APMicroeconomics_LessonTopBanner.png

The Market Lesson

Individually, demand and supply do not reveal a great deal about the efficiency of the market in which consumers and producers are interacting. However, demand and supply can be placed on the same graph and additional analysis can be made.

Market Equilibrium Video

View the video below to learn more. To make the video full screen, click the double arrows at the bottom right corner of the object.

Example: The Market for Gasoline

Price per Gallon Quantity Demanded per Week Quantity Supplied per Week
$1.90 100,000 65,000
$2.00 90,000 70,000
$2.10 80,000 80,000
$2.20 75,000 95,000

The Market for Gasoline Graph

Market for Gasoline Graph X-axis - Quantity Y-axis - Price per Gallon Graph shows the areas of surplus (above equilibrium) and shortage (below equilibrium) of gasoline. Equilibrium is at the center where the quantity demanded and supplied is equal. Equilibrium is at a quantity of 80,000 gallons and a price of $2.10.

When operating efficiently, a market will seek to arrive at equilibrium. The equilibrium has two parts - the equilibrium price and the equilibrium quantity. As you can see using either the schedule or the graph above, the equilibrium price is $2.10 and the equilibrium quantity is 80,000 gallons.  

  • The equilibrium price is the price at which the quantity demanded equals the quantity supplied. It is found where the curves intersect. It produces the equilibrium quantity for the market.
  • Surpluses (QS > QD) exist when the price in the market is greater than the equilibrium price. For example, at a price of $2.20, suppliers wish to provide 95,000 gallons, while consumers only wish to buy 75,000 gallons. To determine the size of the surplus, subtract: QS - QD. At this price, the surplus will equal 20,000 gallons.  
  • Shortages ( QD > QS) exist when the price in the market is less than the equilibrium price. For example, at a price of $2.00, consumers wish to purchase 90,000 gallons, but suppliers will only provide 70,000 gallons. To determine the size of the shortage, subtract: QD – QS. At this price, the shortage will equal 20,000 gallons.  
  • As price moves closer to the equilibrium, the size of the surplus or shortage will get smaller.  

Changes in Equilibrium

Changes can occur in the equilibrium in response to a change in demand, a change in supply, or a change in both demand and supply. Please note: this is referring to shifts of the demand and/or supply curves because of a change in the determinants of these curves.

  • When only one of the curves shifts, both the change in the equilibrium price and quantity can easily be determined. A shift of one curve will produce movement along the other curve. For example, a rightward shift of the demand curve produces pressure on the price to rise. Now that price is rising, the quantity supplied of the good will increase (to meet the new demand). 

Changes in Equilibrium

Changes In Equilibrium Graph x-axis Quantity Y-axis - Price (in dollars) Increase in demand = increase in Pe and increase in Qe *shifts demand curve right *puts pressure on price to rise *the increasing price causes an increase in quantity supplied (movement along supply curve)

  • When both curves shift, a definitive statement on the impact of the shifts on both equilibrium price and quantity can only be made if you are given information about the relative sizes of the shifts. Without the relative sizes of the shifts, you can tell the impact on only one component of the equilibrium.

APMicroeconomics_LessonBottomBanner.png

IMAGES CREATED BY GAVS (Creative Commons License Attribution)