Equilibrium With Supply And Demand Curves

We often show the market equilibrium through a supply-and-demand diagram like the one in Figure 3-7; this figure combines the supply curve from Figure 3-5 with the demand curve from Figure 3-2. Combining the two graphs is possible because they are drawn with exactly the same units on each axis.

We find the market equilibrium by looking for the price at which quantity demanded equals quantity supplied. The equilibrium price comes at the intersection of the supply and demand curves, at point C.

How do we know that the intersection of the supply and demand curves is the market equilibrium? Let us repeat our earlier experiment. Start with the initial high price of $5 per box, shown at the top of the price axis in Figure 3-7. At that price, suppliers

FIGURE 3-7. Market Equilibrium Comes at the Intersection of Supply and Demand Curves

The market equilibrium price and quantity come at the intersection of the supply and demand curves. At a price of $3, at point C, firms willingly supply what consumers willingly demand. When the price is too low (say, at $2), quantity demanded exceeds quantity supplied, shortages occur, and the price is driven up to equilibrium. What occurs at a price of $4?

want to sell more than demanders want to buy. The result is a surplus, or excess of quantity supplied over quantity demanded, shown in the figure by the black line labeled "Surplus." The arrows along the curves show the direction that price tends to move when a market is in surplus.

At a low price of $2 per box, the market shows a shortage, or excess of quantity demanded over quantity supplied, here shown by the black line labeled "Shortage." Under conditions of shortage, the competition among buyers for limited goods causes the price to rise, as shown in the figure by the arrows pointing upward.

We now see that the balance or equilibrium of supply and demand comes at point C, where the supply and demand curves intersect. At point C, where the price is $3 per box and the quantity is 12 units, the quantities demanded and supplied are equal: there are no shortages or surpluses; there is no tendency for price to rise or fall. At point C and only at point C, the forces of supply and demand are in balance and the price has settled at a sustainable level.

The equilibrium price and quantity come where the amount willingly supplied equals the amount willingly demanded. In a competitive market, this equilibrium is found at the intersection of the supply and demand curves. There are no shortages or surpluses at the equilibrium price.

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