Equilibrium Flashcards
Equilibrium
Equilibrium is when supply equals demand.
I.e. where the quantity customers are willing to purchase matches the quantity that suppliers are willing to supply at a given price.
From the market equilibrium we can derive market price and market quantity
The market equilibrium is not fixed, it is likely to change over time due to changes in the pattern of demand and demand.
Equilibrium
Plot both demand and supply curves.
Equilibrium – change in demand
The diagram shows a shift outwards of the demand curve (caused by perhaps increasing incomes or the increasing price of the substitute good).
Initially at market equilibrium we have Price P and Quantity Q.
A new equilibrium is created where D1 cuts the original supply curve. Prices rise to P1 and Quantity demanded and supplied expands to Q1.
Equilibrium – change in demand
In this diagram we see a shift to the left of the demand curve (perhaps caused by a fall in price of a substitute).
Again we start with Price P and Quantity Q.
After the shift in demand curve we have a new equilibrium with P1 and Q1.
The impact of the shift in the demand curve has been to reduce price and to cause a contraction in the quantity demanded and supplied
Equilibrium – change in supply
For example, bad weather normally decreases the supply of fruit. With The shift in the supply curve inwards, there will be movement along the demand curve to a new equilibrium price. Consumers will buy less because of the higher price.
Equilibrium – change in supply
A shift outwards to the right of the supply curve (S1) perhaps caused by falling costs.
The shift outwards results in a fall in price (P1) and an increase in quantity demanded and supplied (Q1).
A Shift versus a Movement Along a Demand Curve
● It is essential to distinguish between a movement along a demand curve and a shift in the demand curve.
● A change in price results in a movement along a fixed demand curve. This is also referred to as a change in quantity demanded. For example, an increase in video rental prices from £3 to £4 may reduce the quantity demanded from 30 units to 20 units.
● This price change results in a movement along a given demand curve.
● A change in any other variable that influences quantity demanded
produces a shift in the demand curve. A shift in the demand curve changes the equilibrium position
A Shift versus a Movement Along a Supply Curve
● As with demand curves, it is essential to distinguish between a movement along a given supply curve and a shift in a supply curve. A change in price results in a movement along a fixed supply curve. This is also referred to as a change in quantity supplied.
● For example, if the rental price of videos rises from £3 to £4, quantity supplied increases from 30 to 40 units.
● A change in any other variable that influences quantity supplied produces a shift in the supply curve.
PRICE ELASTICITY OF DEMAND (PED)
● Price elasticity of demand measures the responsiveness of demand to a change in price
● You can think of PED as the way that consumers react (how much of a good they demand) as the price changes
