Demand and Supply for Gasoline: Equilibrium. At this equilibrium point, the market is efficient because the optimal amount of gasoline is being produced and consumed. Efficiency in the demand and supply model has the same basic meaning: the economy is getting as much benefit as possible from its scarce resources, and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.
We will explore this important concept in detail in the next module on applications of supply and demand. Improve this page Learn More. Skip to main content. Module 3: Supply and Demand. Search for:. Equilibrium, Surplus, and Shortage Learning Objectives Define equilibrium price and quantity and identify them in a market Define surpluses and shortages and explain how they cause the price to move towards equilibrium.
Figure 1. The supply and demand curves for gasoline. Figure 2. A price above equilibrium creates a surplus. Try It. Figure 3. A price below equilibrium creates a shortage. Watch It Watch this video for a closer look at market equilibrium:. Glossary efficiency: when the optimal amount of goods are produced and consumed, minimizing waste equilibrium: price and quantity combination where supply equals demand equilibrium price: the only price where the quantity supplied in a market equals the quantity demanded equilibrium quantity: the quantity both supplied and demanded at the equilibrium price shortage or excess demand : situation where the quantity demanded in a market is greater than the quantity supplied; occurs at prices below the equilibrium surplus or excess supply : situation where the quantity demanded in a market is less than the quantity supplied; occurs at prices above the equilibrium.
Did you have an idea for improving this content? Licenses and Attributions. CC licensed content, Shared previously. This will induce them to lower their price to make their product more appealing. In order to stay competitive many firms will lower their prices thus lowering the market price for the product.
In response to the lower price, consumers will increase their quantity demanded, moving the market toward an equilibrium price and quantity. In this situation, excess supply has exerted downward pressure on the price of the product. This will cause a race to the bottom until the price is at the equilibrium level. Who sets the price? With many different firms and consumers, no individual has the power to influence price.
But collectively, their actions determine it. This brings us to the core conclusion of this chapter: market price is determined by the interactions between supply and demand. Equilibrium is formally defined as a state of rest or balance due to the equal action of opposing forces.
In economics, these forces are supply and demand. As we will see, when supply and demand are not in balance, economic forces will work until the balance is restored. Figure 3. As price rises, quantity demand for hot dog falls, and quantity supplied rises. There are two important points on this diagram. First is equilibrium quantity Q E. Q E is where the quantity supplied is equal to the quantity demanded.
It is important to recognize this value and the mechanism that leads us there. There is only one price that corresponds with equilibrium quantity, and that is equilibrium price P E. The question remains, how do we arrive at equilibrium? What if the price is above our equilibrium value? How will the equal and opposite forces bring it back to equilibrium? There are a number of reasons why the price may be too high.
One common example that we will explore in greater depth in Topic 4 is the price floor. Regardless of the cause, we see in Figure 3. This excess supply is also known as a surplus. There are too many sellers who are enticed by the high price, and not enough buyers. Consider a hot dog vendor, Paul, in this situation. This will result in wasted product, and a surplus of hotdogs in the market. If vendors were forced to stay in this market, the quantity supplied would fall to , as vendors would quickly reduce production to what customers are willing to purchase.
In order to sell all his hot dogs, Paul could start offering the hot dogs for a cheaper price until he is able to sell everything he produces. In this case, every vendor has the incentive to drop their price, since all else equal consumers will purchase the product with the lowest price. As price falls, two things occur:. Notice that both supply and demand are forces that bring the market back to equilibrium.
What if price is lower than equilibrium? This is depicted in Figure 3. When price is too low, the quantity demanded is greater than quantity supplied. This excess demand is known as a shortage.
In this situation, the low price causes an excess of buyers. Taxes and perfectly inelastic demand. Taxes and perfectly elastic demand. Economic efficiency. Lesson Overview: Taxation and Deadweight Loss. Practice: Tax Incidence and Deadweight Loss.
0コメント