Equilibrium Price, Equilibrium Quantity and the Interrelation of Markets

Take-Away for the next few days  The forces of supply and demand work to establish a price at which the quantity of goods and services people will buy is equal to the quantity suppliers will provide.  If supply or demand changes, equilibrium price and quantity change.  Finally, the equilibrium price and quantity of a good or service established by supply and demand affect the equilibrium price and quantity in other markets. Market prices determine what to produce, how to produce and whom to produce it for.

Equilibrium- State of balance between opposing forces. It occurs because elsewhere there is a state of imbalance or disequilibrium. Price (per DVD) QSQSQSQS QDQDQDQD Surplus(+) Shortage (- ) $ $ $ Price per DVD $ S D Quantity of DVDs supplied and demanded (per week) Excess demand Excess supply E 78

Shifts in Demand and Supply  A. Increase in Demand –D- increase –P- increase –Quantity supplied- increase  B. Decrease in Demand –D- decrease –P- decrease –Quantity supplied- decrease  C. Increase in Supply –S- increase –P- decrease –Quantity demanded- increase  D. Decrease in Supply –S- decrease –P- increase –Quantity demanded- decrease

Increase in Demand Price (per DVDs) A S0S0 Quantity of DVDs (per week) $ D0D0 D1D1 B Excess demand C

B A Price (per DVDs) Quantity of DVDs (per week) $ D0D0 S0S0 C S1S1 Decrease in Supply