In the previous concepts we learned about the two sides of the market: supply and demand. So what's the point of learning about price and quantity demanded of suppliers and consumers? When we combine these ideas, we can understand the market as a whole!
Eq’m (Equilibrium) occurs at the price where quantity demanded = quantity supplied.
You may have noticed that our demand and supply graphs had the same Y-axis and X-axis. This allows us to combine the graphs to show the Market for a particular good.
Let’s continue to use our example of the white sneaker market.
Recall the demand schedule for white sneakers that shows the relationship between price and quantity demanded.
|Price of White Sneakers ($)||Quantity Demanded|
Also recall the supply schedule for white sneakers which shows the relationship between price and quantity supplied.
|Price of White Sneakers ($)||Quantity Supplied|
Now, let's plot these two schedules on the same graph.
The supply curve is shown as the blue line and the demand curve is shown as the green line. Notice that the two lines intersect at a certain point. At that point, quantity supplied and quantity demanded are the same value!
Therefore, the point of intersection is Equilibrium.
A question you will see on a lot of tests is: "What should the price of a good?" Let’s find out what the price of white sneakers should be in this example.
First, we find the point where Quantity Demanded = Quantity Supplied. Based on the graph, we find out that it is a quantity of 2.
This means our equilibrium quantity is 2 units, as shown in the graph above.
At a quantity of 2, what price are suppliers and consumers willing to sell/buy white sneakers? We can determine this by seeing what the price is when when the market is in equilibrium.
This shows us that our equilibrium price is $150 dollars as shown in the graph above.
A question you will likely see on exams will consist of two equations. One equation is for the demand curve and the other is for the supply curve. The question will ask you to determine both the equilibrium price and quantity.
Using our example from above, we would be given these two equations...
Demand = -50q + 250
Supply = 50q +50
...which would result in the following equilibrium quantity...
250 = 100q + 50
200 = 100q
2 = q
...and the following equilibrium price!
Supply = 50(2) + 50 = 150
Demand = -50(2) + 250 = 150
This means that the equilibrium price is $150!