Equilibrium
Equilibrium
  • Only one price and quantity are compatible with the existing intentions of both the buyers and the sellers.
  • Equilibrium Price – The price at which the quantity of a good demanded in a given time period equals the quantity supplied.
  • Market Clearing 
    1. An equilibrium doesn't imply that everyone is happy with the prevailing price or quantity.
    2. The equilibrium price is not determined by any single individual.  Rather it is determined by the collective behavior of many buyers and sellers, each acting out his or her own demand or supply schedule.
    3. Although not everyone gets full satisfaction from the market equilibrium, that unique outcome is efficient.
    4. The Invisible Hand
      • The equilibrium price and quantity reflect a compromise between buyers and sellers.  No other compromise yields a quantity demanded that's exactly equal to the quantity supplied.
      • Adam Smith characterized this market mechanism as “the invisible hand”.
Surplus and Shortage
  • When seller's asking prices are too high, a market surplus is created.
  • Market Surplus – The amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply.
  • An Initial Shortage - When seller's asking prices are too low, a market shortage is created.
  • Market Shortage  - The amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand.
  • Self-Adjusting Prices
    • Whenever the market price is set above or below the equilibrium price, either a market surplus or a market shortage will emerge.
    • To overcome a surplus or shortage, buyers and sellers will change their behavior.
    • Only at the equilibrium price will no further adjustments be required.
Changes in Equilibrium
  • No equilibrium price is permanent.
  • The equilibrium price will change whenever the supply or demand curve shifts.
  • A Demand Shift – Should the demand curve shift, the result will be a change in equilibrium price and quantity.
  • A Supply Shift – Should the supply curve shift, the result will be a change in equilibrium price and quantity.
  • Changes in supply and demand occur when the determinants of supply and demand change.
Market Outcomes
  • Optimal, Not Perfect
    • Not everyone is happy with market outcomes, but we are given the opportunity to maximize our own satisfaction.
    • Although the outcomes of the marketplace are not perfect, they are often optimal, i.e., the best possible given our incomes and scarce resources.
Changing Yearly Data to Base Year Data:
  • decide on a base year  (in our example below we use 1990 as the base year)
  • convert each year's numbers by using the following formula
        year to convert
       ----------------- x 100 = base year value for the new year
           base year
  • the new values reflects a relative (i.e., percentage) change from the base year
Year
US Exports
in billions
US Imports
in billions
US Exports
1990 base year
US Imports
1990 base year
1990
389
498
100
100
1991
417
491
107
99
1992
440
536
113
108
1993
457
589
117
118
1994
502
669
129
134
1995
576
749
148
150
1996
612
803
157
161
1997
680
876
175
176
1998
670
917
172
184
1999
684
1030
176
207
2000
773
1223
199
246




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this page is maintained by Reed Fisher
last updated January 15, 2011