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Transcript:

1 What is market equilibrium?
It’s when quantity demanded equals to quantity supplied at a given price.

3 Can you guess where’s the market equilibrium here?
4 Yes, at $3, both Qd and Qs are equal, at 6.
5 Plot the values into a graph… (cut)
8 And this is simply the intersection between the demand and supply curves.

9 Wow,
10 when the amount the sellers want to sell is equal to the amount the buyers want to buy,
Everyone is happy.
Price is stable at market equilibrium.
Anywhere else, price tends to change.

11 At a price below market equilibrium,
12 say at $2, sellers want to sell this amount.
14 Buyers? This amount.
16 There’s a shortage.

17 As sellers, with so many customers fighting to buy your goods,
18a,b Sit back and wait and jack up the price, boy!
19 As price increases, some buyers drop out.
20 More sellers enter.
21 Oh….back to market equilibrium.

22 At a price above market equilibrium,
23 Say at $5,
24 sellers want to sell this amount.
25 Buyers? This amount.
27 Eww…There’s a surplus
28a With so few buyers,
28b Better drop your price
28c Or risk not selling your apples at all.
29 As price drops,
30 some sellers drop out and more buyers enter.
31 Oh…back to market equilibrium. Again!
So the market equilibrium price is the only point where price is stable.

Wait a minute…
32 What happens if we have this super powerful firm
that can influence price?
33 Well, we assume we have a competitive market.
There are many similar sellers and buyers.
With so many of them, none can influence price.
34 They are price takers.
35 The market sets the price.

38 And here’s the summary.
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Next up: Shifts in demand and supply curves


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Why is price stable at market equilibrium?

Market equilibrium is a point where the demand and supply curves intersect. At the point of intersection, equilibrium price and quantity are determined. This is where price is stable, that is, there is no tendency for the price to change.

When price is below market equilibrium, quantity demanded is higher that quantity supplied, resulting in a shortage. This exerts an upward pressure on price and price increases until it reaches market equilibrium.

When price is above market equilibrium, quantity supplied exceeds quantity demanded, resulting in a surplus. There is a glut of goods in the market which exerts a downward pressure on price. Price decreases until it reaches market equilibrium.

In this model, we assume that this is a competitive market. In other words, there are many similar sellers and buyers. Each of them is so insignificant that none can influence price. Hence, the price is set through the invisible hand aka the free market.