Posts Tagged ‘Equilibrium Price And Quantity’

Chapter Summary

Thursday, August 5th, 2010


  1. In competitive industries, the nature of supply is such that increases in the price of a product will cause increases in the quantity supplied.
  2. Increases in supply will shift the supply curve to the right, while decreases in supply will shift the curve to the left.
  3. If the quantity supplied does not increase significantly in response to a price increase, supply is “inelastic,” while supply is “elastic” if price increases cause large increases in the quantity supplied.
  4. In competitive markets, supply and demand interact freely to determine the equilibrium price and quantity, which will change as supply and/or demand change.

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The Nature of Supply

Wednesday, July 21st, 2010


For this price will be bid up toward the equilibrium level of $6. Only at a price of $6 per kilogram are the actions of both buyers and sellers in harmony, so that there is neither a surplus nor a shortage. As a result, the price will stabilize at the equilibrium level of $6 per kilogram.

The interaction of supply and demand can also be shown on a graph, as in Figure 7-13. On the graph, the equilibrium price of $6 is determined by the intersection of the supply curve and the demand curve at the equilibrium point (E). Similarly, the intersection of the curves determines the quantity that will be bought (and sold), or the “equilibrium quantity” of 50,000 kilograms.

In summary, the way in which supply and demand interact to determine the price of a product or service can be represented on a schedule such as Figure 7-12, or on a graph such as Figure 7-13. Both the schedule and the graph depict the behavior of buyers (demand) and sellers (supply) in the market for a particular good or service, and the equilibrium price and quantity that will emerge in that market.

Figure 7-13 is a very static representation of a market, showing the demand for and supply of steak at a particular time (March 1982). In reality, however, markets are not static as Figure 7—13 seems to suggest, but are dynamic, with constant changes in supply and demand occurring, causing continual changes in equilibrium prices and quantities. In effect, then, Figure 7—13 is a snapshot of a dynamic, changing situation at a particular point in time. In the next chapter, we will consider how markets change and adjust in response to changes in both supply and demand.

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