Competitive Market Equilibrium
Market Equilibrium = occurs when quantity demanded and quantity supplied are equal
- Qs = Qd
- This price = market clearing price >> everything will be sold out
- There is no tendency for the price to change
- Ideal situation for a free market
Market Disequilibrium = there is excess demand (shortage) or excess
supply (surplus), and the forces of supply and demand cause the price to change until the market
reaches equilibrium - in a free market
- Excess Supply = Surplus
- Qs > Qd
- At the initial price producers are willing and able to produce x
units of product z but consumers are only willing and able to
buy y units of the product >>> leaves an excess of x – y units
- Producers will then lower their prices to encourage consumers to
purchase the excess units
- As the price falls, Qs falls & Qd rises
- As long as there is a surplus there will be downward pressure on
the price >> will keep decreasing until Qs = Qd and surplus is
eliminated
- Excess Demand = Shortage
- Qs < Qd
- There is now an excess demand and a shortage of the product z
- As the price continues to decrease, producers are now only
willing and able to produce x - y units but consumers are now
willing and able to buy x units
- Producers will recognise the shortage in z and start to raise the
price >> Qd begins to fall and Qs rises
- The shortage exerts an upward pressure on price
>> will keep increasing until Qs = Qd and shortage is eliminated
E.g. market for chocolate bars
, Demand Curve Shifts:
- Some change in determinant causes the - Some change in determinant causes leftward
demand curve to shift right (increase) from shift (decrease) in demand curve from D1 to D2
D1 to D2 - Given D3, at P1 there is movement from point a
- Given D2, at P1 there is movement from to b >> resulting in excess supply = a – b
point a to b >> resulting in excess demand - b = disequilibrium where Qs > Qd, exerting
=b–a downward pressure on price
- b = disequilibrium where Qd > Qs, >> causes movement along D3 to point c,
exerting upward pressure on price excess supply is eliminated
>> causes movement along D2 to point c, - Lower equilibrium price & lower equilibrium
excess demand is eliminated quantity
- Higher equilibrium price & higher
equilibrium quantity
Supply Curve Shifts:
- A determinant causes a leftward shift
- A determinant causes a rightward shift
(decrease) in the supply curve to S3
(increase) in the supply curve to S2
- At S3, at P1, there is a move from a to b >>
- At S2, at P1, there is a move from a to b >>
excess demand = a – b
excess demand = b – a
- b = disequilibrium due to Qd > Qs
- b = disequilibrium due to Qs > Qd
- Price begins to rise >> results in poitive
- Price begins to fall >> results in negative
movement along S3 to point c, excess demand
movement along S2 to point c, excess
is eliminated
supply is eliminated
- Higher equilibrium price & lower equilibrium
- Lower equilibrium price & lower
quantity
equilibrium quantity
Market Equilibrium = occurs when quantity demanded and quantity supplied are equal
- Qs = Qd
- This price = market clearing price >> everything will be sold out
- There is no tendency for the price to change
- Ideal situation for a free market
Market Disequilibrium = there is excess demand (shortage) or excess
supply (surplus), and the forces of supply and demand cause the price to change until the market
reaches equilibrium - in a free market
- Excess Supply = Surplus
- Qs > Qd
- At the initial price producers are willing and able to produce x
units of product z but consumers are only willing and able to
buy y units of the product >>> leaves an excess of x – y units
- Producers will then lower their prices to encourage consumers to
purchase the excess units
- As the price falls, Qs falls & Qd rises
- As long as there is a surplus there will be downward pressure on
the price >> will keep decreasing until Qs = Qd and surplus is
eliminated
- Excess Demand = Shortage
- Qs < Qd
- There is now an excess demand and a shortage of the product z
- As the price continues to decrease, producers are now only
willing and able to produce x - y units but consumers are now
willing and able to buy x units
- Producers will recognise the shortage in z and start to raise the
price >> Qd begins to fall and Qs rises
- The shortage exerts an upward pressure on price
>> will keep increasing until Qs = Qd and shortage is eliminated
E.g. market for chocolate bars
, Demand Curve Shifts:
- Some change in determinant causes the - Some change in determinant causes leftward
demand curve to shift right (increase) from shift (decrease) in demand curve from D1 to D2
D1 to D2 - Given D3, at P1 there is movement from point a
- Given D2, at P1 there is movement from to b >> resulting in excess supply = a – b
point a to b >> resulting in excess demand - b = disequilibrium where Qs > Qd, exerting
=b–a downward pressure on price
- b = disequilibrium where Qd > Qs, >> causes movement along D3 to point c,
exerting upward pressure on price excess supply is eliminated
>> causes movement along D2 to point c, - Lower equilibrium price & lower equilibrium
excess demand is eliminated quantity
- Higher equilibrium price & higher
equilibrium quantity
Supply Curve Shifts:
- A determinant causes a leftward shift
- A determinant causes a rightward shift
(decrease) in the supply curve to S3
(increase) in the supply curve to S2
- At S3, at P1, there is a move from a to b >>
- At S2, at P1, there is a move from a to b >>
excess demand = a – b
excess demand = b – a
- b = disequilibrium due to Qd > Qs
- b = disequilibrium due to Qs > Qd
- Price begins to rise >> results in poitive
- Price begins to fall >> results in negative
movement along S3 to point c, excess demand
movement along S2 to point c, excess
is eliminated
supply is eliminated
- Higher equilibrium price & lower equilibrium
- Lower equilibrium price & lower
quantity
equilibrium quantity
