Skip to main content

Microeconomics: Market Equilibrium

Since we now know what the demand and supply are in an economic model, we can combine both curves to determine the equilibrium price in the market.

A market is in equilibrium at the point where the demand curve intersects the supply curve. In other words, where the supplied quantity is equal to the quantity demanded. The equilibrium price is the point in the market where there is no shortage or surplus.
  • Markets do not automatically reach equilibrium. Instead, it is achieved after a number of trials and errors. The more information both the buyers and suppliers have, the faster the process.
  • If a price is higher than the market equilibrium price, then the quantity supplied is higher than the quantity demanded, this results in a surplus. These excess units of goods produced incentives the producers to reduce the price and thereby reduces the quantity produced until the market reaches equilibrium.
  • If a price is less than the market equilibrium price, then the quantity supplied is smaller than the quantity demanded. This results in a shortage. In the long run, the shortage causes consumers to drive up the price, which causes the quantity demanded to decrease and the quantity supplied to increase until the price reaches equilibrium.
From the graph, the price PE represents the equilibrium price. At the price P1, the amount producers offer for sale is less than the amount consumers are willing to buy (i.e: there is a shortage). Finally, the price P2 illustrates a case of surplus, where the number of goods produced is higher than the amount consumers are willing to buy.



Reference: Mayer,David. AP Microeconomics Crash Course. Research & Education Association (2014). p 54-55.
Labels:

Comments

Post a Comment

Popular posts from this blog

Macroeconomics: multiplier and crowding out effects

Multiplier effect: whenever   any of the components of AD increases, the increase in GDP will be greater than the initial increase in expenditures. The impact on GDP of a particular increase in spending depends on the proportion of the new income that is taken out of the system to the proportion that continues to circulate in the economy. The multiplier effect tells us the impact a particular change in one the components of AD will have on the total income (GDP).  Let k denote the spending multiplier, which is a function of MPC and MPS. The larger the marginal propensity to consume, the larger the spending multiplier. Notice that the larger the MPC, the greater the impact a particular change in the spending variables will have on the nation's GDP. The crowding out effect: If government spending increases without an increase in taxes, the government must borrow funds from the private sector to finance its deficit, thereby increasing the interest rate. This increase in interest ...
Post a Comment
Read more

Exercise: inflation and GDP deflator

You have the following table containing information about country Y's GDP deflator, nominal, and real GDP. If the base year is 2015, fill in the blanks and then find the annual inflation rate for each year. Year  Nominal GDP  GDP Deflator  Real GDP 2015 $23,457 100 $23,457 2016 $25,752 ... $23,943 2017 $25,982 108.1 ... 2018 $26,016 ... $25,431.1 2019 $26,323 105.5 ... Solution: Year  Nominal GDP  GDP Deflator  Real GDP   Inflation rate 2015 $23,457 100 $23,457 n.a 2016 $25,752 107.6 $23,943 7.6% 2017 $25,982 108.1 $24,035.2 0.45% 2018 $26,016 102.3 $25,431.1 -5.37% 2019 $26,323 105.5 $24,950.6 3.13%  GDP deflator for the year 2018: Real GDP for the year 2017: General formula to find real GDP by re-arranging the GDP deflator formula: Notice that the sub-index i is for the year. The (annual) inflation rate is simply the growth rate of prices from a year to its previous year: Inflation rate of the year 2018: Notice that in 2018 country Y experienced...
Post a Comment
Read more

Microeconomics: Factor Markets

Definition: Factor markets: markets for the factors of production (example: labor and capital). Markets are formed whenever consumers and producers meet to exchange goods or services. Deriving factor demand: the demand for goods or services in the product markets creates demand for the factors of production.  An increase (decrease) in demand for good X leads the suppliers to increase their production thereby increasing (decreasing) the demand for the factors of production.   Marginal revenue product: The demand for the factor of production is formed by multiplying a firm's marginal revenue by its marginal product.  Remember that by taking the derivative of the TR function with respect to Q we are able to find the MR. Marginal product on the other hand is found by taking the derivative of the production function with respect to a factor of production (L or K for example). Marginal revenue product (MRP): the change in total revenue when one more input is employed. It decrea...
Post a Comment
Read more