Lecture 5: Supply and Demand

Question 1

Equilibrium is a situation in which………

Answer 1

Equilibrium is a situation in which there is no tendency for change. A market will be in equilibrium when there is no reason for the market price of the product to rise or to fall. This occurs at the price where quantity demanded equals quantity supplied. At this price, the amount that consumers wish to buy is exactly the same as the amount that producers wish to sell.
-When the price is above the equilibrium of $3, quantity supplied is greater than quantity demanded. Firms are unable to sell all they want to at that price. There is an excess supply and this surplus creates pressure for the price to fall. If the price is below equilibrium, there is excess demand and the shortage creates pressure for the price to rise. Only at the equilibrium price is there no pressure for price to rise or fall.

Question 2

Increase Demand

Answer 2

An increase in demand means that consumers wish to purchase more of the good at every price than before. Graphically, the demand curve shifts up to the right. As a result of an increase in demand, the equilibrium price rises as does the equilibrium quantity bought and sold. Notice that an increase in demand has no effect on the supply curve. Firms do increase production, but only in response to the higher market price.

Question 3

Decrease Demand

Answer 3

A decrease in demand, on the other hand, means that people wish to purchase less of this good at every price than before. The demand curve shifts down to the left. The equilibrium price and quantity both decrease. Again, the shift of the demand curve has no effect on the supply curve. From the point of view of producers, all that has happened is that the market price has fallen. So, firms decrease the quantity supplied. The supply curve itself does not shift. A movement along the supply curve occurs.