Equilibrium & Disequilibrium

Part 1 - Equilibrium A demand curve will tell you what quantity demanded (qd) will be IF you know the price. -IF the price is $45, quantity demanded will be… 60. Demand Schedule for Video Games PriceQuantity Demanded $9015 $7530 $6045 $4560 $3075 $1590 $90 $75 $60 $45 $30 $15 $ P Q D

Part 1 - Equilibrium - IF the price is $75, quantity demanded will be… But the demand curve does not tell you what the price actually is. Demand Schedule for Video Games PriceQuantity Demanded $9015 $7530 $6045 $4560 $3075 $1590 $90 $75 $60 $45 $30 $15 $ P Q D

Part 1 - Equilibrium A supply curve will tell you what quantity supplied (q s ) will be IF you know the price. -IF the price is $45, quantity supplied will be… 30. Supply Schedule for Video Games PriceQuantity Supplied $9075 $7560 $6045 $4530 $3015 $150 $90 $75 $60 $45 $30 $15 $ P Q S

Part 1 - Equilibrium - IF the price is $75, quantity supplied will be… But the supply curve does not tell you what the price actually is. Supply Schedule for Video Games PriceQuantity Supplied $9075 $7560 $6045 $4530 $3015 $150 $90 $75 $60 $45 $30 $15 $ P Q S

Part 1 - Equilibrium - The actual price for a product does not come from the demand curve alone. - And the actual price for a product does not come from the supply curve alone. - The actual price for a product comes from the demand curve and the supply curve together.

Part 1 - Equilibrium One the next page, use the demand table and the supply table given to draw both the demand curve and the supply curve for video games on the same graph. Let’s take a closer look at this. $90 $75 $60 $45 $30 $15 $ P Q S D Supply and Demand for Video Games

Part 1 - Equilibrium $90 $75 $60 $45 $30 $15 $ P Q S D - The point where the supply curve and the demand curve cross is called… equilibrium. Equilibrium - This is the price for this product that we will actually see in the store. Equilibrium Price PePe - If we start at equilibrium and go straight left, we will find the… equilibrium price (Pe).

Part 1 - Equilibrium $90 $75 $60 $45 $30 $15 $ P Q S D - If the price is higher or lower than this (which is called “disequilibrium”),… Equilibrium Price PePe - In this case, if we have this supply curve and this demand curve, the price for video games will be… $60. the price will eventually move to the equilibrium price.

Part 1 - Equilibrium $90 $75 $60 $45 $30 $15 $ P Q S D - If we start at equilibrium and go straight down, we will find the equilibrium quantity (q e ). Equilibrium - This is the amount that will be made and it is the amount that will be bought. Equilibrium Price PePe qeqe Equilibrium Quantity - In other words, equilibrium quantity is both quantity supplied and quantity demanded.

Part 1 - Equilibrium $90 $75 $60 $45 $30 $15 $ P Q S D Equilibrium Price PePe qeqe Equilibrium Quantity - In this case, equilibrium quantity is This means that, if we have this supply curve and this demand curve, suppliers will make 45 video games, and demanders will buy 45 video games. - Equilibrium is the point where quantity supplied and quantity demanded are equal (qs = qd)!!

Part 1 - Equilibrium - We can also find equilibrium price and equilibrium quantity by looking at the supply and demand schedules. - Since equilibrium is the point where quantity supplied and quantity demanded are equal (qs = qd), Supply Schedule for Video Games PriceQuantity Supplied $9075 $7560 $6045 $4530 $3015 $150 Demand Schedule for Video Games PriceQuantity Demanded $9015 $7530 $6045 $4560 $3075 $1590 what price has the same quantity supplied and quantity demanded? - At a price of $60, quantity supplied and quantity demanded are both 45.

Part 1 - Equilibrium - This is the only price where they are equal to each other. - That means this must be our equilibrium point. - Given these schedules, equilibrium price is $60 and equilibrium quantity is 45. Supply Schedule for Video Games PriceQuantity Supplied $9075 $7560 $6045 $4530 $3015 $150 Demand Schedule for Video Games PriceQuantity Demanded $9015 $7530 $6045 $4560 $3075 $1590

Part 1 - Equilibrium -So equilibrium tells us: -1.) How much a product will cost (equilibrium price). -2.) How much of a product will be made (equilibrium quantity). -3.) How much of a product will be bought (which is also equilibrium quantity).

Part 2 - Disequilibrium Disequilibrium happens when the actual price is above or below the equilibrium price. When in disequilibrium, supply and demand are not equal. This means that there will be either a shortage (too little) or a surplus (to much) of the product. For example: When the actual price is higher than the equilibrium price, then a surplus (Q s >Q D ) occurs.

P Q S D pepe qeqe p1p1 qdqd Example: When actual price is above equilibrium price - Here, the price is supposed to be $15, but it is actually $20. - To find quantity demanded (q d ) at this price, go straight out from that price until you hit the demand curve. - Then, go straight down. - Quantity Demanded is People only want to buy 20 of this product because the price is high $20 $15 $10 $5

P Q S D pepe qeqe p1p1 qsqs qdqd Example: When actual price is above equilibrium price - To find quantity supplied (q d ), go out from the actual price until you hit the supply curve. - Then, go straight down. - Quantity supplied is A lot of people are making a lot of this product because the price is high. - (Remember, sellers like high prices… - That’s how they make their money) $20 $15 $10 $5

P Q S D pepe qeqe p1p1 qsqs qdqd Example: When actual price is above equilibrium price - Since quantity supplied (40) is greater than quantity demanded (20), we have a surplus. - q s > q d - What does this look like in the stores? - Shelves full of unsold items. - What is the exact amount of the surplus? - If we are making 40 and selling 20, how many are left over? The size of the surplus is $20 $15 $10 $5

P Q S D pepe qeqe p1p1 qsqs qdqd Example: When actual price is above equilibrium price - If you were selling this product, what would you do to your price? - Lower it (and make less). - You would do this until you are selling all that you are making. - In other words, you would lower your price until there is no more surplus. - This would happen at the equilibrium price of $15. - There, quantity supplied (30) equals quantity demanded (30) $20 $15 $10 $5

Disequilibrium Another example: When the actual price is lower than the equilibrium price, then a shortage (Q d >Q s ) occurs.

P Q S D pepe qeqe qsqs p1p1 $5 $10 $15 $ Example: When actual price is below equilibrium price - Here, the price is supposed to be $15, but it is actually $10. - To find quantity supplied ( q s ) at this price, go straight out from that price until you hit the supply curve. - Then, go straight down. - Quantity supplied is Not a lot of people are making this product because the price is low. - They would rather make something else that will sell for more money.

P Q S D pepe qeqe qdqd qsqs p1p1 $5 $10 $15 $ Example: When actual price is below equilibrium price - To find quantity demanded (qd) at this price, go straight out from that price until you hit the demand curve. - Then, go straight down. - Quantity demanded is People want to buy 40 of this product because the price is low.

P Q S D pepe qeqe qdqd qsqs p1p1 $5 $10 $15 $ Example: When actual price is below equilibrium price - Since quantity demanded (40) is greater than quantity supplied (20), we have a shortage. - q d > q s - What does this look like in the stores? - Empty shelves. - What is the exact amount of the shortage? - If people want to buy 40, but we are only making 20, how many short are we? The size of the shortage is 20.

P Q S D pepe qeqe qdqd qsqs p1p1 $5 $10 $15 $ Example: When actual price is below equilibrium price - If you were selling this product, what would you do to your price? - Raise it (and make more) - You would do this until people stop buying the product. - In other words, you would raise your price until there is no more shortage. - This would happen at the equilibrium price of $15. - There, quantity supplied (30) equals quantity demanded (30).

Disequilibrium So, in a free market economy, the market for any particular product automatically moves toward equilibrium. When there is a surplus, sellers automatically lower their prices and make less. When there is a shortage, sellers automatically raise their prices and make more. So how can there ever be a lasting shortage or surplus?

WE’ll SOON SEE!!! But not today.