Chapter 3  Supply and Demand

III.  Market Equilibrium

Now we put together the behavior of buyers (part one) and the behavior of sellers (part two) to have a model of the whole market for pizza.

Market Equilibrium

Recall the demand and supply schedules for pizza delivered in Oswego in a week:
 
Price of pizza Quantity of pizza demanded
(per week in Oswego)
Quantity of pizza supplied
(per week in Oswego)
$25 100 800
$20 210 700
$15 300 625
$10 500 500
$5 650 300

Note that at a price of $10, the quantity supplied = the quantity demanded = 500.
If we plot the supply and demand curves on the same set of axes, we get the following illustration of the pizza market:

The supply and demand curves intersect at the point where quantity supplied = quantity demanded. This intersection is what we call an equilibrium price. This is the price where the intentions of both the buyer and seller are compatible: Buyers want to buy the exact amount the sellers want to sell.

Why is (500, $10) an equilibrium? To understand why, let's think about what would happen if the price was greater than or less than $10.

So an equilibrium point is a point of rest, where there is no incentive for buyers or sellers to change their decisions. However, if one of the other factors affecting demand and supply change, then the demand and/or supply curves will shift, and a new equilibrium will result. Let's consider a few examples

Changes in Equilibrium

Let's consider a few examples.

Example 1: Suppose that the price of Chinese food delivery rises. What happens to the market for pizza? Let's figure this out with a 3 step approach:

Example 2: Suppose instead that the Chinese food business is incredibly popular and profitable. What happens to the market for pizza? Again, we use the same three step approach:


Example 3: Now lets combine examples 1 and 2 so that the demand for pizza increases AND the supply of pizza decreases. What happens to the market for pizza?

The table below summarizes how changes in demand and supply affect equilibrium price (P) and quantity (Q).
 
no change in demand
(no shift)
increase in demand
(shift right)
decrease in demand
(shift left)
no change in supply
(no shift)
no change in P
no change in Q
P increases
Q increases
P decreases
Q decreases
increase in supply
(shift right)
P decreases
Q increases
P ?
Q increases
P decreases
Q ?
decrease in supply
(shift left)
P increases
Q decreases
P increases
Q?
P?
Q decreases

Want to test your understanding? The links below will allow you to test your understanding of supply and demand. Your CD ROM also has self-quizzes on chapter 3.

Check Your Head -- A chapter 3 quiz on your textbook's web site.

Exploring Supply and Demand-- An online quiz on supply and demand by Kim Sosin