SUPPLY AND DEMAND TOGETHER

Having analyzed supply and demand separately we now combine them to see how they determine the quantity of a good sold in a market and its price.

Equilibrium

The market supply curve and market demand curve together. Notice that there is one point at which the supply and demand curves intersect. This point is called the market’s equilibrium. The price at this intersection is called the equilibrium price and the quantity is called the equilibrium quantity. Here the equilibrium price is $2.00 per cone and the equilibrium quantity is 7 ice cream.

The dictionary defines the word equilibrium as a situation in which various forces are in balance and this also describes a market’s equilibrium. At the equilibrium price the quantity of the good that buyers are swilling and able to buy exactly balances the quantity that sellers are willing and able to sell. The equilibrium price is sometimes called the market- clearing price because at this price everyone in the market has been satisfied. Buyers have bought all they want to buy and sellers have sold all they want to sell.

The actions of buyers and sellers naturally move markets toward the equilibrium to supply and demand. To see why consider what happens when the market price is not equal to the equilibrium price.

At a price of $2.50 per con the quantity of the good supplied (10 cones ) exceeds the quantity demanded (4 cones). There is a surplus of the good. Suppliers are unable to sell all they want at the going price. A surplus is sometimes called a situation of excess supply. When there is a surplus in the ice-cream market sellers of ice cream find there freezers increasingly full of ice cream they would like to sell but cannot. They respond to the surplus by cutting their prices. Falling prices in turn increase the quantity demanded and decrease the quantity supplied. Prices continue to fall until the market reaches the equilibrium.

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