Price Determination

Equilibrium Px & Qty

Equilibrium: State of balance or rest

Equilibrium Price

• Price at which Qd = Qs
• If equilibrium px is not reached, market forces would push price back into equilibrium
• Determine using DD/SS graph

Market Equilibrium

Occurs at a price at which the quantity demanded by consumers is equal to the quantity supplied by producers.

• At Px above equilibrium, Qs > Qd, surplus present, downward pressure on Px
• At Px below equilibrium, Qd > Qs, shortage present, upward pressure on Px

Changes in Equilibrium Px and Qty

Shift in Demand

• Demand increase, demand curve move right, supply curve remains
• Qs increase along supply curve, Qd decrease along demand curve
• Final Px and Qty higher than original

Shift in Supply

• Supply increase, Supply curve move right, demand curve remains
• Qd increase along demand curve, Qs decrease along supply curve
• Final Px lower, Qty higher

Simultaneous shifts in Demand and supply

• Final Px and Qty indeterminate (depends on extent of shifts)
• Decrease both, Px indeterminate, Qty decrease
• Increase both, Px indeterminate, Qty increase
• Increase Supply, Decrease Demand, Px decrease, Qty indeterminate
• Decrease Supply, Increase Demand, Px increase, Qty indeterminate