Determination of Equilibrium Price And Quantity - SS2 Economics Lesson Note

Equilibrium price and quantity are determined by the intersection of the supply and demand curves in a market. The demand curve shows the quantity of a product that consumers are willing to buy at different prices. Typically, the quantity demanded decreases as the price increases (i.e., there is an inverse relationship between price and quantity demanded). 

On the other hand, the supply curve shows the quantity of a product that producers are willing to sell at different prices. Typically, the quantity supplied increases as the price increases (i.e., there is a positive relationship between price and quantity supplied).

When the supply and demand curves are plotted on the same graph, the point at which they intersect is called the equilibrium point. At this point, the quantity demanded by consumers is equal to the quantity supplied by producers, and the market is said to be in equilibrium.

The price at this equilibrium point is known as the equilibrium price, and the quantity sold at this price is known as the equilibrium quantity. Any price or quantity above or below this equilibrium point will create a surplus or a shortage, respectively, in the market, which will eventually cause the price and quantity to adjust until the market reaches a new equilibrium point.

 

Word problems on determination of equilibrium price and quantity

Example 1:

A new technology is introduced that decreases the cost of producing a certain product. What happens to the equilibrium price and quantity in the market for this product?

Solution:

Assuming demand remains constant, the decrease in cost of production will cause an increase in supply. This will cause a shift in the supply curve to the right. As a result, the equilibrium price will decrease and the equilibrium quantity will increase.

 

Example 2:

A natural disaster destroys a significant portion of the crops that are used to produce a certain food item. What happens to the equilibrium price and quantity in the market for this food item?

Solution:

Assuming demand remains constant, the decrease in supply of the food item will cause a shift in the supply curve to the left. This will cause the equilibrium price to increase and the equilibrium quantity to decrease, as consumers are willing to pay more for a limited supply of the food item.

 

Example 3:

Suppose the demand curve for a product is Qd = 100 - 2P and the supply curve is Qs = 20 + 3P. What is the equilibrium price and quantity?

Solution:

Setting Qd = Qs, we have:

100 - 2P = 20 + 3P

Simplifying the equation, we get:

80 = 5P

P = 16

Substituting P = 16 into either the demand or supply equation, we get:

Qd = 100 - 2(16) = 68

Qs = 20 + 3(16) = 68

The equilibrium price is $16 and the equilibrium quantity is 68 units.