• If you are citizen of an European Union member nation, you may not use this service unless you are at least 16 years old.

  • You already know Dokkio is an AI-powered assistant to organize & manage your digital files & messages. Very soon, Dokkio will support Outlook as well as One Drive. Check it out today!

View
 

Equilibrium Price and Quantity

Page history last edited by Matt Seastrand 10 months, 3 weeks ago

 

Focus Question:  How does supply and demand determine equilibrium price and quantity in the product, resource, and financial markets?

 

 

Overview:

You'll recall that microeconomics revolves around the principal of supply and demand. When the supply goes up and demand stays the same, prices drop because they have an excess of their product and need to get rid of it. The opposite is true as well, when the supply stays the same and the demand goes up , so do prices because the demand for a product is greater than the amount there. The location of equilibrium price and quantity is dependent on the supply and demand curves.

 

The equilibrium price is the price of a product when the amount of supply is equal to the demand. It is the only time when the quantity supplied by producers and the quantity demanded by consumers is the same. On a graph, the equilibrium price is the point where the the supply curve intersects the demand curve. 

 

Cross-Link: Supply and Demand

 

Essential Vocab

 

Supply - the amount of a product that is available

 

Demand - the amount of a product that is desired by the consumers

 

Equilibrium - a condition where market forces (ex. supply and demand) are in balance and are at rest

 

Equilibrium Price - the price at which supply = demand

 

Equilibrium Quantity - the quantity demanded at which supply = demand

 

Real World Example: Oil

 

To apply these concepts to the real world, let's look at a market which effects millions of Americans: the market for oil. We will use a graph to model this market, and examine the effects world events may have effected it. Prior to the pandemic, the demand for oil as well as the supply for oil were are certain levels, represented in the graph by line D1 and line S1. The equilibrium price and quantity prior to the pandemic (Points P1 and D1) are derived from the point where these lines intersect, shown by the dotted lines. 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When the pandemic occurred, quarantine policies made people drive a lot less, making their need for gas decrease. The demand for oil thus decreased. This decrease is represented in the graph by the new demand curve, line D2 in red. The supply curve remains the same. Where the new demand curve intersects the supply curve is how we will derive the new equilibrium price and quantity. These are shown at points P2 and Q2. The new equilibrium quantity is lower than the previous one because consumers have less need for oil. The new equilibrium price is lower because in order to get rid of their excess product. 

 

Price Floors and Ceilings

 

The equilibrium price is the most efficient outcome for the market. All consumers who want a product can buy it and all the products that producers create are sold. The but government policies can sometimes prevent the market from reaching equilibrium price and quantity. These are called price floors and price ceilings. A price ceiling is when the government mandates that the price for a certain good cannot exceed a certain amount. A price floor is when the government mandates that a price/wage must be above a certain amount. The graphs below represent these scenarios.

 

  

 

In the market for housing graph, the government has introduced a price ceiling (the solid, horizontal, orange line) that says the price of rent cannot exceed the price PC. Since the equilibrium price (shown as PE) is above this ceiling, the market will not be able to reach it. Instead the market will try and get as close as possible, which means the market price will be where the price ceiling is set (PC). At this price, the quantity demanded is greater than quantity supplied (QD > QS). In short, consumers want to buy more of the product than firms are willing to produce. This is called a shortage. The magnitude of the shortage can be derived by subtracting the quantity supplied from the quantity demanded (QD - QS).

 

In the market for labor graph, the government has introduced a price floor (the solid, horizontal, purple line) that says the price of labor (or wage) cannot be below the price PF. Since the equilibrium price (shown as PE) is below this ceiling, the market will not be able to reach it. Instead the market will try and get as close as possible, which means the market price will be where the price floor is set (PF). At this price, the quantity demanded is lesser than quantity supplied (QD < QS). In short, firms want to produce more of the product than consumers are willing to buy. This is called a surplus. The magnitude of the surplus can be derived by subtracting the quantity demanded from the quantity supplied (QS - QD). 

 

 

 

Click here for a good website to supplement lessons with. It has videos and quiz questions. 

 

For a website that further explains equilibrium prices, how to calculate it, videos, and practice questions, click here

For a website on the significance of know the equilibrium price, click here

 

 


This short video is a Common Core teaching resource and rap song on supply and demand.

 

  • Supply and demand can be further examined by watching this short clip.



Video on Equilibrium Price https://www.youtube.com/watch?v=7eZcPs9z9OA

Khan Academy video on Equilibrium Price https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/market-equilibrium-tutorial/v/market-equilibrium#!


http://www.socialstudiesforkids.com/articles/economics/supplyanddemand1.htm



Lemonade Stand Economics activity to get kids to understand how to run business/deal with supply and demand.

Supply and Demand Youtube links for kids, simple

 

The equilibrium price is something small business do not track and is impoartant for successful businesses. For minoirties intersted in opening businesses and want to explore how to do so successfully, click here

 

Click here for a lesson plan entitled "Demand, Supply and the Market"

 

Comments (0)

You don't have permission to comment on this page.