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Chapter 2.4

ECON202 Chapter Notes - Chapter 2.4: Economic Equilibrium, Demand Curve, Shortage

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Harvey King

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2.4 Market Equilibrium: Bringing Supply and Demand Together
We are going to answer the key question: how do markets allocate scarce goods and services?
We will leave the question of whether the market allocation is fair and/or efficient to Economics
We are going to emphasize the basic competitive market structure, leaving other markets to
Economics 201.
We shall see that price plays the important role in signaling to buyers and sellers as to whether
or not they should buy or sell, and their urge to make profits/surplus is their incentive to follow
those signals.
We have already implicitly incorporated this into our analysis of demand and supply curves,
which show us the quantities demanded/supplied at various prices.
An important concept to understand is equilibrium.
An equilibrium exists when there is no tendency to change.
In a market equilibrium, this means that at the trading prices, all buyers who want to buy can
find someone to sell to them, and all sellers who want to sell can find someone to sell to them. If
this condition was not met, someone would be changing their behaviour.
This implies that at P(equilibrium), the quantity demanded = the quantity supplied.
We represent equilibrium on a graph by the point where the supply and demand curves cross.
The schedule, and Figure 2.7 below, both show an imaginary market for widgets.
Equilibrium occurs when the quantity demanded equals the quantity supplied, which in
this case occurs at a price of 6 and a quantity exchanged of 50 units (as seen in red in the
table below).
We can best see how this is an equilibrium by considering what happens if the price is NOT
equal to the equilibrium price.
Suppose that the price was equal to 8, above the equilibrium price.
This would lead to a quantity supplied of 70 widgets, but a quantity demanded of only 30
In the market, quantity supplied exceeds quantity demanded this is a situation of surplus or
excess supply.
Quantity Demanded
Quantity Supplied
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