ECON 1033: MANAGERIAL ECONOMICS SABH - USL
Handout 3: Concept of Equilibrium – When Supply Meets Demand
Introductory Anecdote
The logic of the model of demand and supply is simple. The demand curve shows the quantities of a particular
good or service that buyers will be willing and able to purchase at each price during a specified period. The supply
curve shows the quantities that sellers will offer for sale at each price during that same period. By putting the two
curves together, we should be able to find a price at which the quantity buyers are willing and able to purchase
equals the quantity sellers will offer for sale.
In summary, at what point (both in quantity and price) will both consumers and sellers agree with each other?
The Concept of Equilibrium
The equilibrium price in any market is the price at which quantity demanded equals quantity supplied. The
equilibrium quantity is the quantity demanded and supplied at the equilibrium price. The equilibrium, therefore,
is characterized by the following function:
𝑄𝑑 = 𝑄𝑠
What happens outside equilibrium? The concept of surplus and shortage
Surplus
A surplus is the amount by which the quantity supplied exceeds the quantity demanded at the current price. There
is, of course, no surplus at the equilibrium price; a surplus occurs only if the current price exceeds the equilibrium
price.
What happens at a period of surplus? Initially, a surplus begins when the price of a good becomes too high, that
it causes less demand than usual. In this case, sellers will find it difficult to sell the goods given a lesser demand at
a higher price.
What happens next? The sellers will decide to lower the price of the good to facilitate easier disposal, at a price
more acceptable to the consumers until the demand finally neutralizes, thus establishing equilibrium again.
Shortage
A shortage is the amount by which the quantity demanded exceeds the quantity supplied at the current price.
What happens at a period of shortage? Initially, a shortage begins when the price of a good becomes low enough
that it drives up the demand for the product. The sellers will find it difficult to cope up with the increase in demand.
BLUE NOTES – ADI, CPA 1
ECON 1033: MANAGERIAL ECONOMICS SABH - USL
What happens next? Sellers will likely begin to raise their prices. As the price rises, there will be an increase in the
quantity supplied (but not a change in supply) and a reduction in the quantity demanded (but not a change in
demand) until the equilibrium price is achieved.
Changes in Demand or Supply, or both – What Now?
Provided below is a summary of the changes in demand and supply and its corresponding effects to equilibrium:
If Demand And Supply Equilibrium Price will Equilibrium Qty. will
Increases Stays the same Increase Increase
Decreases Stays the same Decrease Decrease
Stays the same Increases Decrease Increase
Stays the same Decreases Increase Decrease
Try it out:
Use a supply and demand diagram to analyze each of the following scenarios. Explain briefly. Be sure to show how
both the equilibrium price and quantity change in each case.
a. The economic downturn has led to more people staying home to watch movies, rather than go to a movie
theater. Show how this change in behavior affects the market for microwave popcorn.
b. Suppose that drought conditions in agricultural regions increase the costs of irrigation. How would this
affect the market for fruits and vegetables?
c. The New York Times recently reported on technological advances leading to an increase in the number of
female cows. Female cows are valuable to farmers because they can be used to produce milk. However,
while farmers now have more female cows available to produce milk, they are not happy. Use a supply
and demand diagram for the milk market to explain why.
Suppose that the market for milk can be represented by the following equations:
Demand: P = 12 – 0.5QD
Supply: P = 0.1QS
where P is the price per gallon, and Q represents quantity of milk, represented in millions of gallons of milk
consumed per day. What is the equilibrium?
BLUE NOTES – ADI, CPA 2
