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Equilibrium Final

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14 views4 pages

Equilibrium Final

Uploaded by

om singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Equilibrium

Equilibrium is the state in which market supply and demand balance


each other, and as a result prices become stable. Generally, an over-
supply of goods or services causes prices to go down, which results in
higher demand—while an under-supply or shortage causes prices to go
up resulting in less demand.

The balancing effect of supply and demand results in a state of


equilibrium. E point in the figure represents equilibrium in D=S .

This topic can be explained in two ways:

1. Graphical Representation
2. Mathematical Solution

Graphical Representation of Equilibrium


This topic can be explained with the help of table and figure
given below:-
Table:
Px Qdx Qsx Result Result
Interpret
1 500 100 Qdx >Qsx Excess
Demand
2 400 200 Qdx >Qsx Excess
Demand
3 300 300 Qdx = Qsx Equilibrium
4 200 400 Qdx < Qsx Excess
Supply
5 100 500 Qdx < Qsx Excess
Supply

1
Figure:

Qd<Qs ; Excess Supply

P=4

Eqm E is Equlibrium
Price

Point , where
Price=3
Qd=Qs=300
Qd
P=2
Qs
Qd>Qs ; Excess Demand

Eqm
Quantity
Qd=Qs=300

Quantity

In the above figure,

❖ Equilibrium

Equilibrium Price (P) is at P = 3 where Qd=Qs=300.

❖ Excess Demand

When at the current price level, the quantity demanded is more than
quantity supplied, a situation of excess demand is said to arise in the
market. Excess demand occurs at a price less than the equilibrium price ,
here in above figure at price P = 2; Qd>Qs showing Excess Demand.

2
❖ Excess Supply

Excess supply is a market condition when the quantity supplied is greater


than the demand for a commodity at the prevailing market price. It occurs
at a price greater than the equilibrium price level, here in above figure at
price P = 4; Qs>Qd showing Excess Supply.

Mathematical Solution to determine


Equilibrium

Calculating the Equilibrium Price:


Given Equations:
Qs = 128 + 8P------------(1)
Qd = 478 - 6P-------------(2)
Variables:

• Qs stands for quantity supplied


• Qd stands for quantity demanded
• P stands for price.

Required or find out:

• Calculate the equilibrium price by using the supply and demand equations
above. Show all necessary steps to solve for P.
• Find equilibrium quantity demand and quantity Supply and put your
answer back into the supply and demand equations to see that it is correct.

Solution:
Given Equations:
Qs = 128 + 8P------------(1)
Qd = 478 - 6P-------------(2)

3
We need to make the quantity supplied equal to the quantity demanded in order
to determine the equilibrium price.
Qs = Qd------------------(3)
128 + 8P= 478 - 6P
128 + 8P +6P= 478
8P +6P= 478 -128
14P = 478 -128
14P = 478 -128
14P=350
P = 350/14
P=$25
At the price of $25, the supply and demand curves will intersect. Therefore the
equilibrium price is $25.
To find equilibrium Qs, put p=$25 in equation (1) we have:
Qs = 128 + 8P
Qs= 128 + 8 (25)
Qs= 328----------(4)
To find equilibrium Qd, put p=$25 in equation (2) we have:
Qd = 478 - 6P
Qd= 478 - 6 (25)
Qs= 328----------(5)
Comparing equations (4) and (5); we have:
Qd=Qs=328
To check the answer; Put P=$25 in equation (3), we obtain
Qs = Qd
128 + 8 (25) = 478 - 6 (25)
328 = 328 so the answer checks out.

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