- Market equilibrium
- Changes in market equilibrium
- Changes in equilibrium price and quantity when supply and demand change
- Lesson summary: Market equilibrium, disequilibrium, and changes in equilibrium
- Market equilibrium and disequilibrium
- Changes in equilibrium
In this lesson summary review and remind yourself of the key terms and graphs used in the analysis of markets. Topics include how to use a market model to predict how price and quantity change in a market when demand changes, supply changes, or both supply and demand change.
In a competitive market, demand for and supply of a good or service determine the equilibrium price.
MARKETS: Equilibrium is achieved at the price at which quantities demanded and supplied are equal. We can represent a market in equilibrium in a graph by showing the combined price and quantity at which the supply and demand curves intersect.
For example, imagine that sellers of squirrel repellant are willing to sell units of squirrel repellant at a price of per can. If buyers are willing to buy units of squirrel repellent at that price, this market would be in equilibrium at the price of and at the quantity of cans.
Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages—market forces drive prices toward equilibrium.
A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to eliminate the surplus.
A shortage will exist at any price below equilibrium, which leads to the price of the good increasing.
For example, imagine the price of dragon repellent is currently per can. People only want to buy cans of dragon repellent, but the sellers are willing to sell cans at that price. This creates a surplus because there are unsold units. Sellers will lower their prices to attract buyers for their unsold cans of dragon repellant.
Changes in equilibrium
Changes in the determinants of supply and/or demand result in a new equilibrium price and quantity. When there is a change in supply or demand, the old price will no longer be an equilibrium. Instead, there will be a shortage or surplus, and price will subsequently adjust until there is a new equilibrium.
For example, suppose there is a sudden invasion of aggressive unicorns. There will be more people who want to buy unicorn repellent at all possible prices, causing demand to increase. At the original price, there will be a shortage of unicorn repellant, signaling sellers to increase the price until the quantity supplied and quantity demanded are once again equal.
We can summarize the changes in equilibrium with the following table:
|Change||Change in||Change in|
|Supply increases (shifts right)||P||Q|
|Supply decreases (shifts left)||P||Q|
|Demand increases (shifts right)||P||Q|
|Demand decreases (shifts left)||P||Q|
|Demand Increases, Supply increases||P (indeterminate)||Q|
|Demand Increases, Supply decreases||P||Q (indeterminate)|
|Demand decreases, Supply increases||P||Q (indeterminate)|
|Demand decreases, Supply decreases||P (indeterminate)||Q|
|market||an interaction of buyers and sellers where goods, services, or resources are exchanged|
|shortage||when the quantity demanded of a good, service, or resource is greater than the quantity supplied|
|surplus||when the quantity supplied of a good, service, or resource is greater than the quantity demanded|
|equilibrium||in a market setting, an equilibrium occurs when price has adjusted until quantity supplied is equal to quantity demanded|
|disequilibrium||in a market setting, disequilibrium occurs when quantity supplied is not equal to the quantity demanded; when a market is experiencing a disequilibrium, there will be either a shortage or a surplus.|
|equilibrium price||the price in a market at which the quantity demanded and the quantity supplied of a good are equal to one another; this is also called the “market clearing price.”|
|equilibrium quantity||the quantity that will be sold and purchased at the equilibrium price|
Key Graphical Models - The market model
Consider the market for giant shiny salamander stickers, given in Figure . Currently, the equilibrium price of these stickers is , and the equilibrium quantity is .
Changes in Supply
Suppose the price of glitter, which is used to make giant shiny salamander stickers, increases so that it now costs the seller more per sticker to produce them. This will cause the supply of this good to decrease. To see the impact a decrease in supply will have on the equilibrium price and quantity, grab the interactive supply curve and shift it to the left until the price is higher at every level of output (the new supply curve should start at ).
What change did you notice? If you adjusted the graph correctly, you should see the equilibrium price increases to , and the equilibrium quantity in this market decreases to stickers.
Now instead, suppose someone invents a new way to produce shiny salamander stickers so there is less waste and fewer resources are needed to produce them. This would result in an increase in the supply of shiny salamander stickers. To see the impact an increase in supply will have on the equilibrium price and quantity, grab the interactive supply curve and drag it to the right so that at every quantity the price is lower (the new supply curve should start at ).
How did you do? If you adjusted the graph correctly, you should see the equilibrium price decreases to and equilibrium quantity increases to stickers.
Changes in demand
Suppose a famous, trendsetting actress starts wearing giant shiny salamander stickers, which makes them instantly the must-have accessory. This would cause the demand for this good to increase. To see the impact on equilibrium price and quantity in the market from an increase in demand, grab the demand curve Figure and shift it to the right to represent an increase in demand.
Changes in both demand and supply
When both supply and demand change at the same time, the impact on equilibrium price and quantity cannot be determined for certain without knowing which changed by a greater amount.
Suppose shiny salamander stickers fall out of popularity, and therefore the demand for them decreases. At the same time, the price of glitter goes up, which leads to a decrease in supply.
On the one hand, the decrease in demand should make price decrease and quantity demanded decrease.On the other hand, the decrease in supply should also make price __increase and quantity demanded decrease. That means we know for certain that the quantity of giant shiny salamander stickers will decrease. But what will happen to price?
In Figure 3, we see a decrease in supply and a decrease in demand. The effect on quantity is easy to determine (quantity will definitely decrease). On the other hand, it is hard to tell if the equilibrium price has increased, decreased, or stays the same. Because we cannot say which of these has happened with certainty, we say that the price change is indeterminate or ambiguous.
Of course, when modeling changes in a graph it is possible to see changes in both equilibrium price and quantity when shifting both demand and supply (depending on how much each curve shifts). In the interactive graph below, move both demand and supply in different directions. Each time, move the equilibrium point to the new intersection of demand and supply. Try to create new equilibria at which:
- Price is higher and quantity is higher
- Price is higher and quantity is lower
- Price is lower and quantity is higher
- Price is lower and quantity is lower
- When showing an equilibrium price and quantity, it is important to clearly label these on the appropriate axis, not just the interior of the graph. Remember that the point on either axis represents the market price and the market quantity, not a point in the middle of the graph.
- When both supply and demand change at the same time, we will not be able to make a statement about what happens to both price and quantity, one of these will be uncertain.
- When both supply and demand increase at the same time, why can't we tell what will happen to the equilibrium price?
- Can you think of an example of a good in your own life for which there was a shortage?
- What happened to the price of that good?
- Using a correctly labeled graph, show the impact on equilibrium price and quantity in the market for pumpkin spiced lattes if the cost of producing them increases.
Want to join the conversation?
- Hi folks! The Practice for Changes in Equilibrium includes questions about consumer surplus and economic surplus, but I'm not sure which video I should watch to learn/review these concepts. Can someone point me in the right direction? Thanks!(10 votes)
- The quiz also includes supply and demand elasticity which is not covered in this unit at all. Could it please be added to the unit or at least removed from the quizes(7 votes)
- if there was a good that is needed to survive, the market equilibrium is inherently exploitative. Take housing as an example. People are willing to pay however much money it takes, which means companies can jack prices up as much as they want to the point where people are living on the streets and dying, and they still keep the prices as high and blame homeless people for being lazy, stupid, and undeserving of basic human rights. Meanwhile, the exploitative industry gets off the hook.(3 votes)
- To be fair, just because someone doesn't have a house doesn't mean they're dying. People can live long lives on the street or in their cars. Another thing is that the example is a bit flawed in that the market is not determined by companies. Normal people sell houses, and they choose the price. Sometimes the average price is crazy, though at other times it's at a good place. Market equilibrium is a natural point of convergence. If prices are sky high, it's not buy a new house or be homeless. Just don't move. The demand goes way down. High prices don't help as much if nobody pays them. No evil corporation keeps the prices high. There is no exploitation. Just a fluctuating market. Another thing to consider is why people are homeless. If it's because they can't afford a house or payments, why is that? Do they have a disability that prevents them from working? If so, there's government recompense for that. Are they addicted to a substance? That would also prevent them from having enough money to make payments. No exploitative industry is calling them lazy, stupid, or undeserving of human rights because A) there is no such industry, and B) people can think whatever they want, and A] it's not our purpose to get everybody to think the same, and B] it doesn't really matter. Also, I don't think having a house is a basic human right. Whenever we talk about rights to ownership of property, that doesn't usually include a minimum.(2 votes)
- what happen when demand increases, supply decreases?(2 votes)
- Explain the difference between firm and industry(2 votes)
- A firm is a single entity that produces goods or services. Think companies like your local barber shop, or Amazon. An industry is instead a group of firms that all produce similar products. Take the auto industry as an example. It could include multiple different independent firms such as Toyota and Tesla. Both of these firms produce cars, which puts them together in the same industry.(3 votes)
- > On the one hand, the decrease in demand should make price decrease and quantity demanded decrease.On the other hand, the decrease in supply should also make price __increase and quantity demanded decrease. That means we know for certain that the quantity of giant shiny salamander stickers will decrease. But what will happen to price?
What does '__' represent above?(2 votes)
- This is a formatting error. According to the way Khan Academy articles are written, the "__" was supposed to make the word "increase" in italics, but instead it wasn't closed off and stayed there. You can fix this mistake in the article by clicking the "report a mistake" link inside the box where you go to answer questions. Hope this helped!(2 votes)
- When both supply and demand increase at the same time, why can't we tell what will happen to the equilibrium price?
I tried sketching this out on a graph, but I was able to get a new equilibrium price. I must be doing something wrong, could someone kindly provide an explanation?
Thanks :)(2 votes)
- When drawing a market equilibrium graph, you will always be able to get a new equilibrium price, simply by seeing where the new curves intersect. However, in questions where no definite numbers and no exact "magnitude" of the shift, we can't really determine where exactly the new equilibrium price moved. A rightward shift in both supply and demand means that quantity is definitely increasing no matter the magnitude of the shifts in supply and demand, but the change in price is indeterminate (it could go both ways - increase/decrease).
Hope this helps!(2 votes)