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MARKET EQUILIBRIUM

MARKET EQUILIBRIUM. Microeconomics Made Easy by William Yacovissi Mansfield University William Yacovissi All Rights Reserved. MARKET EQUILIBRIUM. Market equilibrium is perhaps the most important concept in economics.

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MARKET EQUILIBRIUM

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  1. MARKET EQUILIBRIUM Microeconomics Made Easy by William Yacovissi Mansfield University William Yacovissi All Rights Reserved

  2. MARKET EQUILIBRIUM • Market equilibrium is perhaps the most important concept in economics. • Demand and supply are independent of each other. What you will pay for a product depends on how valuable it is to you, not what it cost to make it. Likewise, a willingness to produce and supply a product is determined by the cost of production.

  3. MARKET EQUILIBRIUM • How are the differences between demanders who want to buy at a low price, and suppliers who want to sell at a high price reconciled? • Like any other disagreement, the two sides negotiate to see if there is a any way they can agree on a price and a quantity.

  4. MARKET EQUILIBRIUM • These negotiations take place through the auction of the marketplace, in which offers to buy and sell are made. • If no agreement can be reached on price and quantity, the negotiations stop, the product doesn’t get produced, and consumers don’t get to buy it.

  5. MARKET EQUILIBRIUM • If an agreement can be reached on price and quantity, the product gets produced and sold to everyone’s satisfaction. • This price and quantity that satisfies the desires of consumers and the desires of producers is called the market equilibrium.

  6. MARKET EQUILIBRIUM • It exists if there is some price and quantity on the demand curve that is the same as the price and quantity on the supply curve. • If this point does not exists, there will be no market for the product.

  7. MARKET EQUILIBRIUM • With supply and demand information, the existence of this point can be quickly established. • Using the example of video rentals, it can easily be seen that a price of $3 and a quantity of 300 is the market equilibrium.

  8. MARKET EQUILIBRIUM • In a real market, participants have to discover what the equilibrium is. This can be done because any price other than the equilibrium price results in a surplus or shortage of the good in the market.

  9. MARKET EQUILIBRIUM IN TABLE FORM

  10. MARKET EQUILIBRIUM IN GRAPH FORM

  11. MARKET EQUILIBRIUM IN EQUATION FORM Qd = 600 - 100(Price) and Qs = 100(Price)Set: Qd = Qs Substitute: 600 - 100(Price) = 100(Price) Simplify: 600 = 200(Price) Solve: $3 = Price Qd = 600 - 100(Price) Qs = 100(Price) Qd = 600 - 100(3) Qs = 100(3) Qd = 300 Qs = 300

  12. MARKET DISEQUILIBRIUM • A market left alone will automatically move to a market equilibrium. Why is this so? • Because any price other than the equilibrium price results in a surplus or shortage in the market

  13. MARKET DISEQUILIBRIUM • The existence of a surplus or shortage triggers a price change in the right direction • Can you see why? • A surplus causes prices to fall and a shortage causes prices to rise.

  14. PRICE BELOW EQUILIBRIUM

  15. PRICE ABOVE EQUIULIBRIUM

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