Prices Below Equilibrium

Prices Below Equilibrium

INSERT DIAGRAM HERE.

At any market price below the equilibrium, the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve) is greater than the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price).

At prices below the equilibrium, there is a shortage of the product. The quantity demanded exceeds the quantity supplied. This situation will not be maintained very long. Since some buyers are unable to find a seller of the product at the current market price, the price of the product will tend to rise and a larger quantity of the product will be produced. (This represents a movement up the supply curve.)

As the price rises in this market, there is an increase in the quantity of this product that is supplied. (This represents a movement up the supply curve.) There also is a decrease in the quantity demanded. (This represents a movement up the demand curve.)

At any price below equilibrium, there is pressure for the market price to rise (because the quantity demanded exceeds the quantity supplied). This pressure continues until the market price reaches equilibrium.



Figure 11. An illustration of how prices below equilibrium create a shortage.

In equilibrium,
• there is no pressure for the price to change.
• the quantity supplied equals the quantity demanded.

If a market is not in equilibrium, market forces are pushing it toward equilibrium.

Prices Above Equilibrium

Prices Above Equilibrium

INSERT DIAGRAM HERE.

At any market price above the equilibrium price, the quantity supplied by producers (represented by the horizontal distance between the vertical axis and the supply curve at that price) is larger than the quantity demanded by consumers (represented by the horizontal distance between the vertical axis and the demand curve).

When the market price is above the equilibrium price, there is a surplus of the product. The quantity supplied exceeds the quantity demanded. This situation will not be maintained very long. Since some sellers are unable to find buyers for all of their products at the current market price, the price of the product will tend to fall and a smaller quantity of the product will be produced. (This represents a move down the supply curve toward the origin.)

When stores at the mall have things that do not sell as quickly as expected, they put them on sale, don't they?

As the price falls in this market, there is an increase in the quantity of this product that is demanded. (This represents a movement down the demand curve.)

At any price above equilibrium, there is pressure for the market price to fall (because the quantity supplied exceeds the quantity demanded). This pressure continues until the market price reaches equilibrium.


Figure 10. An illustration of how prices above equilibrium create a surplus.

Equilibrium

INSERT DIAGRAM HERE.

In common usage, equilibrium refers to a point of equality or balance. In economics, equilibrium occurs at the price at which the quantity supplied equals the quantity demanded. It is illustrated by the point where the supply and demand curves intersect.

The equilibrium quantity is the quantity supplied and demanded at the equilibrium price. It is represented graphically by the horizontal distance between the vertical axis and the supply and demand curves at the equilibrium price.

The equilibrium price is the price at which the quantity supplied equals the quantity demanded.

The market price is the price actually charged in the marketplace. It may or may not be the same as the equilibrium price.

A surplus is the amount by which the quantity supplied exceeds the quantity demanded. A surplus occurs when the market price is above the equilibrium price. A surplus is also called excess supply.

A shortage is the amount by which the quantity demanded exceeds the quantity supplied. A shortage occurs when the market price is below the equilibrium price. A shortage is also called excess demand.

Price of a hamburger Quantity of hamburgers supplied Quantity of hamburgers demanded
$5 5 1 Surplus
$4 4 2 Surplus
$3 3 3 Equilibrium
$2 2 4 Shortage
$1 1 5 Shortage
Table 4. An example of a using supply and demand schedules to determine whether a market is in equilibrium or has a shortage or surplus.



Figure 9. An illustration of equilibrium.