Market equilibrium occurs when quantity supplied equals quantity demanded. The market naturally tends toward equilibrium as supply and demand adjust prices. When the price is above equilibrium, a surplus occurs as quantity supplied is greater than demanded. When price is below equilibrium, a shortage occurs as demand exceeds supply. Prices act as signals that help adjust supply and demand toward reaching equilibrium.

1. Equilibrium
Academic Decathlon—Lesson 8
Berryhill Economics

2. Equilibrium
 Equilibrium is a state of balance. Market
equilibrium is when the quantity
demanded is equal to quantity supplied.
 There is no tendency for change at
equilibrium.
 The markets naturally tend towards
equilibrium.

3. Equilibrium

4. Equilibrium
 The equilibrium point is where the two
graphs meet. At this point, Qd = Qs.
 QE represents the quantity demanded and
supplied at equilibrium.
 PE represents the price at equilibrium.
 The market will operate at equilibrium.
However, if something shifts the demand
or supply curves, the equilibrium P and Q
will change.

5. Equilibrium
 The market wants to operate at
equilibrium.
 It’s similar to an atom that gives or
receives electrons to become balanced.
 That’s what the market does, supply and
demand will adjust and try to find
equilibrium naturally.
 The market will always move itself to
equilibrium, ceteris paribus.

6. Surplus and Shortage
 Sometimes the price for an item isn’t at
equilibrium. Either sellers have mistakenly
put too high a price or too low a price
onto a product.
 The price system will adjust itself to get
back to equilibrium on it its own.
 The price, Qs and Qd all act as signals to
consumers and producers until the market
finds the correct price.

7. Surplus and Shortage
 Let’s say the market price is set above
equilibrium:

8. Surplus and Shortage
 If price is above equilibrium price, Qs will
be higher than Qd.
 That means there will be lots of stuff left
on the shelf because people don’t want to
buy the product for that high of a price.
 This is called a surplus.
 A surplus is a situation of excess supply in
a market (Qd < Qs).

9. Surplus and Shortage
 As suppliers begin to incur losses because
they are producing more items than are
selling, they will start lowering prices
(sale!)
 If the price is lower, more people will buy
the product, so there is an increase in Qd
 If the price is lower, producers will
respond by supplying less (decrease Qs)

10. Surplus and Shortage
 This will go on, little by little, until
equilibrium is reached and Qd = Qs

11. Surplus and Shortage
 The opposite will occur when price is less
than equilibrium price:

12. Surplus and Shortage
 If the price is set below equilibrium,
Qd>Qs (demand is higher than supply),
this is called a shortage.
 A shortage is a situation of too little supply
in a market (Qd > Qs)
 If the market was to stay here, buyers will
being to outbid each other to get the
product (think of Tickle-Me Elmo).

13. Surplus and Shortage
 As the price goes up, producers will
increase production (increase Qs)
 As the price goes up, buyers will decrease
their quantity demanded (decrease Qd)

14. Surplus and Shortage
 This will go on, little by little, until
equilibrium is reached:

15. Prices as Signals
 This shows that prices—the monetary
value of a product as established by
supply and demand—is a signal that helps
us make our economic decisions.

16. Prices as Signals
 Advantages:
 Prices in a competitive market economy are
neutral because they favor neither the
producer nor the consumer.
 Prices in a market economy are flexible. This
allows the price system to absorb unexpected
shocks and accommodate change.
 Prices have no cost of administration.
 Prices are familiar to us all, allowing decisions
to be made quickly and easily.

17. Price as Signal
 How would we distribute and allocate
goods and services without prices?
 Rationing—a system under which an
agency such as government decides
everyone’s “fair” share
 Lottery?
 Anarchy?

18. Rationing
 Rationing is the most used allocation
system that does not use prices
 Problems with rationing:
 Fairness—who deserves how much?
 High administrative cost
 Diminishing incentive—people do not have as
much motivation to work or produce