APMacro: Market Equilibrium


We bring together supply and demand to see how buying decisions of households and the selling decisions of businesses interact to determine the price of a product and the quantity actually bought and sold. We assume that this is a competitive market and neither buyers nor sellers can set the price.

market-equilibrium-l3fig26

The equilibrium price and quantity are  established at the intersection of the supply and demand curves. The interaction of market demand and market supply adjusts the price to the point at which quantity demanded and supplied are equal. This is the equilibrium price. The corresponding quantity is the equilibrium quantity.

market_equilibrium_11b

An increase in demand increases equilibrium price and quantity. A decrease in demand decreases equilibrium price and quantity. An increase in supply reduces equilibrium price but increases equilibrium quantity. A decrease in supply increases equilibrium price but reduces equilibrium quantity.


Homework:
1) Read Chapter 3 Market Equilibrium pp.53-61

Arrows-02-june

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