equilibrium (market-clearing price/quantity) - no shortage/excess demand/supply
- everyone can buy/sell at current price >> intersection of demand/supply curves
- market price above equilibrium >> surplus supply >> inventories pile up
- price must be cut to re-establish equilibrium, make consumers consume, increase demand
- market price below equilibrium >> excess demand >> not enough to go around
- price must go up to re-establish equilibrium (ie reselling hybrid cars) >> arbitrage
- prices determined by relative supply/demand
- comparative static analysis - compares new/old equilibrium
- comparative dynamic analysis - traces changes over time
- raw materials price falls >> suppliers produce more >> surplus >> prices lowered to reach new equilibrium
- travel down demand curve to new intersection
- income increases >> consumers want to buy more >> shortage >> prices raised to reach new equilibrium
- travel up supply curve to new intersection
- equilibrium never shifts as much as demand/supply curves
- other curve dampens overall effect
changes in supply/demand - can act together in real world to change equilibrium
- increases in classroom costs >> decrease in supply
- increase in people wanting to go to college >> increase in demand
- demand shifts outward, supply shifts inward >> intersection rises in price more drastically
- w/ curve shifts, curve shape still stays the same
Given equations for the demand and supply curves, set them equal to each other to find the equilibrium point.
- Given:
- Qsupply = 100 + 5Psupply
- Qdemand = 200 - 20Pdemand
- at equilibrium, Qsupply = Qdemand, and Psupply = Pdemand
- 100 + 5Psupply = 200 - 20Pdemand
- 100 + 5P = 200 - 20P
- 25P = 100
- P = 4
- Q = 100 + 5P = 120
- equilibrium at P=4, Q=120
Subject:
Subject X2:
