{"id":5742,"date":"2016-07-27T18:09:51","date_gmt":"2016-07-27T18:09:51","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/masterybusiness2xngcxmasterspring2016\/?post_type=chapter&#038;p=5742"},"modified":"2024-05-02T19:34:25","modified_gmt":"2024-05-02T19:34:25","slug":"equilibrium-price-and-quantity","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-introductiontobusiness\/chapter\/equilibrium-price-and-quantity\/","title":{"raw":"Equilibrium, Price, and Quantity","rendered":"Equilibrium, Price, and Quantity"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Explain equilibrium price and quantity<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>Equilibrium: Where Supply and Demand Intersect<\/h2>\r\nWhen two lines on a diagram cross, this intersection usually means something. On a graph, the point where the supply curve (S) and the demand curve (D) intersect\u00a0is the <strong>equilibrium<\/strong>. The <strong>equilibrium price<\/strong> is the only price where the desires\u00a0of consumers and the desires\u00a0of producers agree\u2014that is, where the amount of the product that consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied). This mutually desired\u00a0amount is called the <strong>equilibrium quantity<\/strong>. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price. It should be clear, from the previous discussions of surpluses and shortages, that if a\u00a0 market is not in equilibrium, then market forces will push the market to the equilibrium.\r\n\r\nIf you have only the demand and supply schedules, and no\u00a0graph, then you can\u00a0find the equilibrium by looking for the price level on the tables\u00a0where\u00a0the quantity demanded and the quantity supplied are equal (see the numbers in <strong>bold<\/strong> in Table 1 in the previous page that indicates this point).\r\n<div>\r\n<div class=\"textbox examples\">\r\n<h3>Finding Equilibrium with Algebra<\/h3>\r\nWe\u2019ve just explained two ways of finding a market equilibrium: by looking at a table showing the quantity demanded and supplied at different prices, and by looking at a graph of demand and supply. We can also identify the equilibrium with a little algebra if we have equations for the supply and demand curves. Let's practice solving a few equations that you will see later in the course. Right now, we are only going to focus on the math. Later, you'll learn why these models work the way they do, but let's start by focusing on solving the equations. Suppose that the demand for soda\u00a0is given by the following equation:\r\n<p style=\"text-align: center;\">[latex]Qd=16\u20132P[\/latex]<\/p>\r\nwhere Qd is the amount of soda\u00a0that\u00a0consumers want to buy (i.e., quantity demanded), and <em>P<\/em> is the price of soda. Suppose the supply of soda\u00a0is\r\n<p style=\"text-align: center;\">[latex]Qs=2+5P[\/latex]<\/p>\r\nwhere Qs is the amount of soda\u00a0that\u00a0producers will supply (i.e., quantity supplied). (Remember, these are simple equations for lines). Finally, recall that the soda\u00a0market converges to the\u00a0point where supply equals demand, or\r\n<p style=\"text-align: center;\">[latex]Qd=Qs[\/latex]<\/p>\r\nWe now have a system of three equations and three unknowns (Qd, Qs, and P), which we can solve with algebra.\u00a0Since\r\n<p style=\"text-align: center;\">[latex]Qd=Qs[\/latex],<\/p>\r\nwe can set the demand and supply equations equal to each other:\r\n<p style=\"text-align: center;\">[latex]\\begin{array}{c}\\,\\,Qd=Qs\\\\16-2P=2+5P\\end{array}[\/latex]<\/p>\r\n<strong>Step 1<\/strong>: Isolate the variable by adding 2P to both sides of the equation and subtracting 2 from both sides.\r\n<p style=\"text-align: center;\">[latex]\\begin{array}{l}\\,16-2P=2+5P\\\\-2+2P=-2+2P\\\\\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,14=7P\\end{array}[\/latex]<\/p>\r\n<strong>Step 2<\/strong>: Simplify the equation by dividing both sides by 7.\r\n<p style=\"text-align: center;\">[latex]\\begin{array}{ccc}\\dfrac{14}{7}&amp;=&amp;\\dfrac{7P}{7}\\\\2&amp;=&amp;P\\end{array}[\/latex]<\/p>\r\nThe equilibrium\u00a0price of soda, that is, the price where Qs = Qd, will be $2.\u00a0Now we want to determine the quantity\u00a0amount of soda.\u00a0We can do this by plugging the equilibrium price into <em>either<\/em> the equation showing the demand for soda <em>or<\/em> the equation showing the supply of soda. Let's use demand. Remember, the formula for quantity demanded is the following:\r\n<p style=\"text-align: center;\">[latex]Qd=16-2P[\/latex]<\/p>\r\nTaking the price of $2, and plugging it into the demand equation, we get\r\n<p style=\"text-align: center;\">[latex]\\begin{array}{l}Qd=16\u20132(2)\\\\Qd=16\u20134\\\\Qd=12\\end{array}[\/latex]<\/p>\r\nSo, if the price is $2 each, <em>consumers<\/em> will purchase 12. How much will producers supply, or what is the quantity supplied? Taking the price of $2, and plugging it into the equation for quantity supplied, we get the following:\r\n<p style=\"text-align: center;\">[latex]\\begin{array}{l}Qs=2+5P\\\\Qs=2+5(2)\\\\Qs=2+10\\\\Qs=12\\end{array}[\/latex]<\/p>\r\nNow, if the price is $2 each, <em>producers<\/em> will supply 12 sodas. This means that we did our math correctly, since\r\n<p style=\"text-align: center;\">[latex]Qd=Qs[\/latex]<\/p>\r\nand both Qd and Qs are equal to 12.\u00a0That confirms that we've found the equilibrium quantity.\r\n\r\n<\/div>\r\n<\/div>\r\n<div class=\"textbox key-takeaways\">\r\n<h3>Watch It<\/h3>\r\nWatch this video for a closer look at market equilibrium:\r\n\r\nhttps:\/\/youtu.be\/W5nHpAn6FvQ?t=1s\r\n\r\nYou can <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Intro+to+Business\/Transcriptions\/Episode14MarketEquilibrium_transcript.txt\" target=\"_blank\" rel=\"noopener\">view the transcript for \"Episode 14: Market Equilibrium\" (opens in new window).\u00a0<\/a>\r\n\r\nEquilibrium occurs at the point where quantity supplied = quantity demanded.\r\n\r\n<\/div>\r\n<h2>Equilibrium<strong> and Economic Efficiency<\/strong><\/h2>\r\nEquilibrium is important to create both a balanced market and an efficient market. If a market is at its equilibrium price and quantity, then it has no reason to move away from that point, because it\u2019s balancing the quantity supplied and the quantity demanded. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and equilibrium quantity. This happens either because there is more supply than what the market is demanding, or because there is more demand than the market is supplying. This balance is a natural function of a free-market economy.\r\n\r\nAlso,\u00a0a competitive market that is operating at equilibrium is an efficient market. Economists typically\u00a0define <strong>efficiency<\/strong> in this way: when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, then it becomes possible to benefit at least one party without imposing costs on others.\r\n\r\n[caption id=\"attachment_13581\" align=\"aligncenter\" width=\"450\"]<img class=\"wp-image-13581\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10001333\/gas41-1024x829.jpg\" alt=\"The graph shows a downward sloping demand curve and an upward sloping supply curve for gasoline; the two curves intersect at the point of equilibrium. The point of equilibrium in this graph is 600 million gallons of gas demanded at a price of $1.40 per gallon, making $1.40 per gallon the equilibrium price.\" width=\"450\" height=\"365\" \/> <strong>Figure 1<\/strong>. <strong>Demand and Supply for Gasoline: Equilibrium.<\/strong> At this equilibrium point, the market is efficient because the optimal amount of gasoline is being produced and consumed.[\/caption]\r\n\r\nEfficiency in the demand and supply model has the same basic meaning: the economy is getting as much benefit as possible from its scarce resources, and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/4734760e-1361-4aa2-9070-1b34d92dcfe0\r\n\r\nhttps:\/\/assess.lumenlearning.com\/practice\/9e8ed1db-195c-4acf-8097-e11873150cb9\r\n\r\n<\/div>\r\n<h2>Finding Equilibrium Using the Four-Step Process<\/h2>\r\nWe know that\u00a0equilibrium\u00a0is the place where the supply and demand curves intersect, or the point where buyers want to buy the same amount that sellers want to sell. Let's take a closer look at how to find the equilibrium point using the four-step process. These steps explain how to first draw the demand and supply curves on a graph and find the equilibrium. Next, consider how an economic change (e.g., a natural disaster, a change in production technology, a change in tastes and preferences, income, etc.) might affect supply or demand, then make adjustments to the graph to identify the new equilibrium point.\r\n\r\n<strong>Step 1.<\/strong> Draw demand and supply curves showing the market before the economic change took place. Think about the shift variables for demand and the shift variables for supply. Using this diagram, find the initial equilibrium values for price and quantity.\r\n\r\n<strong>Step 2.<\/strong> Decide whether the economic change being analyzed affects demand or supply. In other words, does the event refer to something in the list of demand shift variables or supply shift variables?\r\n\r\n<strong>Step 3.<\/strong> Determine whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or the amount\u00a0producers want to sell?\r\n\r\n<strong>Step 4.<\/strong> Identify the new equilibrium, and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.\r\n\r\nLet\u2019s consider one example that involves a shift in supply and one that involves a shift in demand. Then we will consider an example where both supply and demand shift.\r\n<div class=\"textbox exercises\">\r\n<h3>Exercise 1: Good Weather for Salmon Fishing<\/h3>\r\nLet's suppose that during the summer of 2015, weather conditions were excellent for commercial salmon fishing off the California coast. Heavy rains meant higher than normal levels of water in the rivers, which helps the salmon to breed. Slightly cooler ocean temperatures stimulated the growth of plankton, the microscopic organisms at the bottom of the ocean food chain, providing everything in the ocean with a hearty food supply. The ocean stayed calm during fishing season, so commercial fishing operations did not lose many days to bad weather. How did these climate conditions affect the quantity and price of salmon?\r\n\r\nLet's consider this situation using the four-step process and the data below.\r\n\r\nTable 1. Salmon Fishing\r\n<table id=\"Table_03_07\" summary=\"The table is called \u201cSalmon Fishing.\u201d It has 4 columns and 7 rows. The four columns are called \u201cPrice per Pound,\u201d \u201cQuantity Supplied in 1999,\u201d \u201cQuantity Supplied in 2000,\u201d and \u201cQuantity Demanded.\u201d Row 1: Price per Pound: $2.00. Quantity Supplied in 2014: 80. Quantity Supplied in 2015: 400. Quantity Demanded: 840. Row 2: Price per Pound: $2.25. Quantity Supplied in 1999: 120. Quantity Supplied in 2000: 480. Quantity Demanded: 680. Row 3: Price per Pound: $2.50. Quantity Supplied in 1999: 160. Quantity Supplied in 2000: 550. Quantity Demanded: 550. Row 4: Price per Pound: $2.75. Quantity Supplied in 1999: 200. Quantity Supplied in 2000: 600. Quantity Demanded: 450. Row 5: Price per Pound: $3.00. Quantity Supplied in 1999: 230. Quantity Supplied in 2000: 640. Quantity Demanded: 350. Row 6: Price per Pound: $3.25. Quantity Supplied in 1999: 250. Quantity Supplied in 2000: 670. Quantity Demanded: 250. Row 7: Price per Pound: $3.50. Quantity Supplied in 1999: 270. Quantity Supplied in 2000: 700. Quantity Demanded: 200.\">\r\n<thead>\r\n<tr>\r\n<th scope=\"col\">Price per Pound<\/th>\r\n<th scope=\"col\">Quantity Supplied in 2014<\/th>\r\n<th scope=\"col\">Quantity Supplied in 2015<\/th>\r\n<th scope=\"col\">Quantity Demanded<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>$2.00<\/td>\r\n<td>80<\/td>\r\n<td>400<\/td>\r\n<td>840<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$2.25<\/td>\r\n<td>120<\/td>\r\n<td>480<\/td>\r\n<td>680<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$2.50<\/td>\r\n<td>160<\/td>\r\n<td>550<\/td>\r\n<td>550<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$2.75<\/td>\r\n<td>200<\/td>\r\n<td>600<\/td>\r\n<td>450<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$3.00<\/td>\r\n<td>230<\/td>\r\n<td>640<\/td>\r\n<td>350<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$3.25<\/td>\r\n<td>250<\/td>\r\n<td>670<\/td>\r\n<td>250<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>$3.50<\/td>\r\n<td>270<\/td>\r\n<td>700<\/td>\r\n<td>200<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nLet's walk through the four steps together using this example and see how the graph changes. Use the interactive graph below (Figure 2) by clicking on the arrows at the bottom of the activity to navigate through the steps.\r\n\r\n<iframe src=\"https:\/\/lumenlearning.h5p.com\/content\/1290477404078402698\/embed\" width=\"1088\" height=\"637\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><script src=\"https:\/\/lumenlearning.h5p.com\/js\/h5p-resizer.js\" charset=\"UTF-8\"><\/script>\r\n<strong>Figure 2 (Interactive Graph). Good Weather for Salmon Fishing: The Four-Step Process.<\/strong>\r\n<p id=\"fs-idm29543312\">In short, good weather conditions increased supply of the California commercial salmon. The result was a higher equilibrium quantity of salmon bought and sold in the market at a lower price.<\/p>\r\n\r\n<\/div>\r\n<div class=\"textbox exercises\">\r\n<h3>Exercise 2: Newspapers and the Internet<\/h3>\r\nAccording to the Pew Research Center for People and the Press, more and more people, especially younger people, are getting their news from online and digital sources. The majority of U.S. adults now own smartphones or tablets, and most of those Americans say they use them in part to get the news. From 2004 to 2012, the share of Americans who reported getting their news from digital sources increased from 24 percent to 39 percent. How has this trend affected consumption of print news media and radio and television news? Figure 3 and the text below illustrate the four-step analysis used to answer this question.\r\n\r\n[caption id=\"attachment_13582\" align=\"aligncenter\" width=\"451\"]<img class=\"wp-image-13582\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10001433\/CNX_Econ_C03_01111-1024x938.jpg\" alt=\"The graph represents the four-step approach to determining changes in equilibrium price and quantity of print news. Step 1: Draw the supply curve (S sub 0) and the demand curve (D sub 0) onto the coordinate plane. The supply and demand curve intersect at the point of equilibrium (labeled E sub 0). The equilibrium point has a corresponding equilibrium price and equilibrium quantity demand, plotted on the graph on the y axis and x axis respectively with the labels P sub 0 and Q sub 0. Step 2: With an increased consumption of digital news, there is a change in demand for print news. Step 3: The change in demand for print news is negative. This decrease in demand for print news is represented by a shift the demand curve to the left. Step 4: This new demand curve (D sub 1) intersects with S sub 0 at a different point on the supply curve, creating a new, lower equilibrium price (labeled E sub 1). The corresponding new equilibrium price (P sub 1) and equilibrium quantity demanded (Q sub 1) are both lower than the original equilibrium price and equilibrium quantity demanded.\" width=\"451\" height=\"413\" \/> <strong>Figure 3. <\/strong>Graph depicting the changing market for print news.[\/caption]\r\n\r\n<strong>Step 1.<\/strong> Draw a demand and supply model to think about what the market looked like before the event.\r\n\r\nThe demand curve D<sub>0<\/sub> and the supply curve S<sub>0<\/sub> show the original relationships. In this case, the curves are drawn without specific numbers on the price and quantity axis.\r\n\r\n<strong>Step 2.<\/strong> Did the change described affect supply or demand?\r\n\r\n[reveal-answer q=\"225238\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"225238\"]A change in tastes, from traditional news sources (print, radio, and television) to digital sources, caused a change in <em>demand<\/em> for the former.[\/hidden-answer]\r\n\r\n<strong>Step 3.<\/strong> Was the effect on demand positive or negative?\r\n\r\n[reveal-answer q=\"58864\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"58864\"]A shift to digital news sources tends to mean a lower quantity demanded of traditional news sources at every given price, causing the demand curve for print and other traditional news sources to shift to the left, from D<sub>0<\/sub> to D<sub>1<\/sub>.[\/hidden-answer]\r\n\r\n<strong>Step 4.<\/strong> Compare the new equilibrium price and quantity to the original equilibrium price.\r\n\r\n[reveal-answer q=\"5745\"]Show Answer[\/reveal-answer]\r\n[hidden-answer a=\"5745\"]The new equilibrium (E<sub>1<\/sub>) occurs at a lower quantity and a lower price than the original equilibrium (E<sub>0<\/sub>).[\/hidden-answer]\r\n\r\nThe decline in print news reading predates 2004. Print newspaper circulation peaked in 1973 and has declined since then due to competition from television and radio news. Fifty-five percent of Americans in 1991 indicated that they got their news from print sources, while only 29 percent did so in 2012. Radio news has followed a similar path in recent decades, with the share of Americans getting their news from radio declining from 54 percent in 1991 to 33 percent in 2012. Television news has held its own during\u00a0the last fifteen years, with the market share staying in the mid- to upper-fifties. What does this suggest for the future, given that two-thirds of Americans under 30 years old say they don't\u00a0get their news from television at all?\r\n\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/0972dde2-e156-497a-b143-ae628da02728\r\n\r\n<\/div>\r\n<h2>Try It<\/h2>\r\nPlay the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts, so that you can gain experience applying the concepts.\r\n\r\n<iframe src=\"https:\/\/www.branchtrack.com\/projects\/evad42sx\/embed\" width=\"850\" height=\"500\" frameborder=\"0\"><\/iframe>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Explain equilibrium price and quantity<\/li>\n<\/ul>\n<\/div>\n<h2>Equilibrium: Where Supply and Demand Intersect<\/h2>\n<p>When two lines on a diagram cross, this intersection usually means something. On a graph, the point where the supply curve (S) and the demand curve (D) intersect\u00a0is the <strong>equilibrium<\/strong>. The <strong>equilibrium price<\/strong> is the only price where the desires\u00a0of consumers and the desires\u00a0of producers agree\u2014that is, where the amount of the product that consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied). This mutually desired\u00a0amount is called the <strong>equilibrium quantity<\/strong>. At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price. It should be clear, from the previous discussions of surpluses and shortages, that if a\u00a0 market is not in equilibrium, then market forces will push the market to the equilibrium.<\/p>\n<p>If you have only the demand and supply schedules, and no\u00a0graph, then you can\u00a0find the equilibrium by looking for the price level on the tables\u00a0where\u00a0the quantity demanded and the quantity supplied are equal (see the numbers in <strong>bold<\/strong> in Table 1 in the previous page that indicates this point).<\/p>\n<div>\n<div class=\"textbox examples\">\n<h3>Finding Equilibrium with Algebra<\/h3>\n<p>We\u2019ve just explained two ways of finding a market equilibrium: by looking at a table showing the quantity demanded and supplied at different prices, and by looking at a graph of demand and supply. We can also identify the equilibrium with a little algebra if we have equations for the supply and demand curves. Let&#8217;s practice solving a few equations that you will see later in the course. Right now, we are only going to focus on the math. Later, you&#8217;ll learn why these models work the way they do, but let&#8217;s start by focusing on solving the equations. Suppose that the demand for soda\u00a0is given by the following equation:<\/p>\n<p style=\"text-align: center;\">[latex]Qd=16\u20132P[\/latex]<\/p>\n<p>where Qd is the amount of soda\u00a0that\u00a0consumers want to buy (i.e., quantity demanded), and <em>P<\/em> is the price of soda. Suppose the supply of soda\u00a0is<\/p>\n<p style=\"text-align: center;\">[latex]Qs=2+5P[\/latex]<\/p>\n<p>where Qs is the amount of soda\u00a0that\u00a0producers will supply (i.e., quantity supplied). (Remember, these are simple equations for lines). Finally, recall that the soda\u00a0market converges to the\u00a0point where supply equals demand, or<\/p>\n<p style=\"text-align: center;\">[latex]Qd=Qs[\/latex]<\/p>\n<p>We now have a system of three equations and three unknowns (Qd, Qs, and P), which we can solve with algebra.\u00a0Since<\/p>\n<p style=\"text-align: center;\">[latex]Qd=Qs[\/latex],<\/p>\n<p>we can set the demand and supply equations equal to each other:<\/p>\n<p style=\"text-align: center;\">[latex]\\begin{array}{c}\\,\\,Qd=Qs\\\\16-2P=2+5P\\end{array}[\/latex]<\/p>\n<p><strong>Step 1<\/strong>: Isolate the variable by adding 2P to both sides of the equation and subtracting 2 from both sides.<\/p>\n<p style=\"text-align: center;\">[latex]\\begin{array}{l}\\,16-2P=2+5P\\\\-2+2P=-2+2P\\\\\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,\\,14=7P\\end{array}[\/latex]<\/p>\n<p><strong>Step 2<\/strong>: Simplify the equation by dividing both sides by 7.<\/p>\n<p style=\"text-align: center;\">[latex]\\begin{array}{ccc}\\dfrac{14}{7}&=&\\dfrac{7P}{7}\\\\2&=&P\\end{array}[\/latex]<\/p>\n<p>The equilibrium\u00a0price of soda, that is, the price where Qs = Qd, will be $2.\u00a0Now we want to determine the quantity\u00a0amount of soda.\u00a0We can do this by plugging the equilibrium price into <em>either<\/em> the equation showing the demand for soda <em>or<\/em> the equation showing the supply of soda. Let&#8217;s use demand. Remember, the formula for quantity demanded is the following:<\/p>\n<p style=\"text-align: center;\">[latex]Qd=16-2P[\/latex]<\/p>\n<p>Taking the price of $2, and plugging it into the demand equation, we get<\/p>\n<p style=\"text-align: center;\">[latex]\\begin{array}{l}Qd=16\u20132(2)\\\\Qd=16\u20134\\\\Qd=12\\end{array}[\/latex]<\/p>\n<p>So, if the price is $2 each, <em>consumers<\/em> will purchase 12. How much will producers supply, or what is the quantity supplied? Taking the price of $2, and plugging it into the equation for quantity supplied, we get the following:<\/p>\n<p style=\"text-align: center;\">[latex]\\begin{array}{l}Qs=2+5P\\\\Qs=2+5(2)\\\\Qs=2+10\\\\Qs=12\\end{array}[\/latex]<\/p>\n<p>Now, if the price is $2 each, <em>producers<\/em> will supply 12 sodas. This means that we did our math correctly, since<\/p>\n<p style=\"text-align: center;\">[latex]Qd=Qs[\/latex]<\/p>\n<p>and both Qd and Qs are equal to 12.\u00a0That confirms that we&#8217;ve found the equilibrium quantity.<\/p>\n<\/div>\n<\/div>\n<div class=\"textbox key-takeaways\">\n<h3>Watch It<\/h3>\n<p>Watch this video for a closer look at market equilibrium:<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Episode 14: Market Equilibrium\" width=\"500\" height=\"375\" src=\"https:\/\/www.youtube.com\/embed\/W5nHpAn6FvQ?start=1&#38;feature=oembed\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>You can <a href=\"https:\/\/course-building.s3-us-west-2.amazonaws.com\/Intro+to+Business\/Transcriptions\/Episode14MarketEquilibrium_transcript.txt\" target=\"_blank\" rel=\"noopener\">view the transcript for &#8220;Episode 14: Market Equilibrium&#8221; (opens in new window).\u00a0<\/a><\/p>\n<p>Equilibrium occurs at the point where quantity supplied = quantity demanded.<\/p>\n<\/div>\n<h2>Equilibrium<strong> and Economic Efficiency<\/strong><\/h2>\n<p>Equilibrium is important to create both a balanced market and an efficient market. If a market is at its equilibrium price and quantity, then it has no reason to move away from that point, because it\u2019s balancing the quantity supplied and the quantity demanded. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and equilibrium quantity. This happens either because there is more supply than what the market is demanding, or because there is more demand than the market is supplying. This balance is a natural function of a free-market economy.<\/p>\n<p>Also,\u00a0a competitive market that is operating at equilibrium is an efficient market. Economists typically\u00a0define <strong>efficiency<\/strong> in this way: when it is impossible to improve the situation of one party without imposing a cost on another. Conversely, if a situation is inefficient, then it becomes possible to benefit at least one party without imposing costs on others.<\/p>\n<div id=\"attachment_13581\" style=\"width: 460px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13581\" class=\"wp-image-13581\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10001333\/gas41-1024x829.jpg\" alt=\"The graph shows a downward sloping demand curve and an upward sloping supply curve for gasoline; the two curves intersect at the point of equilibrium. The point of equilibrium in this graph is 600 million gallons of gas demanded at a price of $1.40 per gallon, making $1.40 per gallon the equilibrium price.\" width=\"450\" height=\"365\" \/><\/p>\n<p id=\"caption-attachment-13581\" class=\"wp-caption-text\"><strong>Figure 1<\/strong>. <strong>Demand and Supply for Gasoline: Equilibrium.<\/strong> At this equilibrium point, the market is efficient because the optimal amount of gasoline is being produced and consumed.<\/p>\n<\/div>\n<p>Efficiency in the demand and supply model has the same basic meaning: the economy is getting as much benefit as possible from its scarce resources, and all the possible gains from trade have been achieved. In other words, the optimal amount of each good and service is being produced and consumed.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_4734760e-1361-4aa2-9070-1b34d92dcfe0\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/4734760e-1361-4aa2-9070-1b34d92dcfe0?iframe_resize_id=assessment_practice_id_4734760e-1361-4aa2-9070-1b34d92dcfe0\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<p>\t<iframe id=\"assessment_practice_9e8ed1db-195c-4acf-8097-e11873150cb9\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/9e8ed1db-195c-4acf-8097-e11873150cb9?iframe_resize_id=assessment_practice_id_9e8ed1db-195c-4acf-8097-e11873150cb9\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<h2>Finding Equilibrium Using the Four-Step Process<\/h2>\n<p>We know that\u00a0equilibrium\u00a0is the place where the supply and demand curves intersect, or the point where buyers want to buy the same amount that sellers want to sell. Let&#8217;s take a closer look at how to find the equilibrium point using the four-step process. These steps explain how to first draw the demand and supply curves on a graph and find the equilibrium. Next, consider how an economic change (e.g., a natural disaster, a change in production technology, a change in tastes and preferences, income, etc.) might affect supply or demand, then make adjustments to the graph to identify the new equilibrium point.<\/p>\n<p><strong>Step 1.<\/strong> Draw demand and supply curves showing the market before the economic change took place. Think about the shift variables for demand and the shift variables for supply. Using this diagram, find the initial equilibrium values for price and quantity.<\/p>\n<p><strong>Step 2.<\/strong> Decide whether the economic change being analyzed affects demand or supply. In other words, does the event refer to something in the list of demand shift variables or supply shift variables?<\/p>\n<p><strong>Step 3.<\/strong> Determine whether the effect on demand or supply causes the curve to shift to the right or to the left, and sketch the new demand or supply curve on the diagram. In other words, does the event increase or decrease the amount consumers want to buy or the amount\u00a0producers want to sell?<\/p>\n<p><strong>Step 4.<\/strong> Identify the new equilibrium, and then compare the original equilibrium price and quantity to the new equilibrium price and quantity.<\/p>\n<p>Let\u2019s consider one example that involves a shift in supply and one that involves a shift in demand. Then we will consider an example where both supply and demand shift.<\/p>\n<div class=\"textbox exercises\">\n<h3>Exercise 1: Good Weather for Salmon Fishing<\/h3>\n<p>Let&#8217;s suppose that during the summer of 2015, weather conditions were excellent for commercial salmon fishing off the California coast. Heavy rains meant higher than normal levels of water in the rivers, which helps the salmon to breed. Slightly cooler ocean temperatures stimulated the growth of plankton, the microscopic organisms at the bottom of the ocean food chain, providing everything in the ocean with a hearty food supply. The ocean stayed calm during fishing season, so commercial fishing operations did not lose many days to bad weather. How did these climate conditions affect the quantity and price of salmon?<\/p>\n<p>Let&#8217;s consider this situation using the four-step process and the data below.<\/p>\n<p>Table 1. Salmon Fishing<\/p>\n<table id=\"Table_03_07\" summary=\"The table is called \u201cSalmon Fishing.\u201d It has 4 columns and 7 rows. The four columns are called \u201cPrice per Pound,\u201d \u201cQuantity Supplied in 1999,\u201d \u201cQuantity Supplied in 2000,\u201d and \u201cQuantity Demanded.\u201d Row 1: Price per Pound: $2.00. Quantity Supplied in 2014: 80. Quantity Supplied in 2015: 400. Quantity Demanded: 840. Row 2: Price per Pound: $2.25. Quantity Supplied in 1999: 120. Quantity Supplied in 2000: 480. Quantity Demanded: 680. Row 3: Price per Pound: $2.50. Quantity Supplied in 1999: 160. Quantity Supplied in 2000: 550. Quantity Demanded: 550. Row 4: Price per Pound: $2.75. Quantity Supplied in 1999: 200. Quantity Supplied in 2000: 600. Quantity Demanded: 450. Row 5: Price per Pound: $3.00. Quantity Supplied in 1999: 230. Quantity Supplied in 2000: 640. Quantity Demanded: 350. Row 6: Price per Pound: $3.25. Quantity Supplied in 1999: 250. Quantity Supplied in 2000: 670. Quantity Demanded: 250. Row 7: Price per Pound: $3.50. Quantity Supplied in 1999: 270. Quantity Supplied in 2000: 700. Quantity Demanded: 200.\">\n<thead>\n<tr>\n<th scope=\"col\">Price per Pound<\/th>\n<th scope=\"col\">Quantity Supplied in 2014<\/th>\n<th scope=\"col\">Quantity Supplied in 2015<\/th>\n<th scope=\"col\">Quantity Demanded<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>$2.00<\/td>\n<td>80<\/td>\n<td>400<\/td>\n<td>840<\/td>\n<\/tr>\n<tr>\n<td>$2.25<\/td>\n<td>120<\/td>\n<td>480<\/td>\n<td>680<\/td>\n<\/tr>\n<tr>\n<td>$2.50<\/td>\n<td>160<\/td>\n<td>550<\/td>\n<td>550<\/td>\n<\/tr>\n<tr>\n<td>$2.75<\/td>\n<td>200<\/td>\n<td>600<\/td>\n<td>450<\/td>\n<\/tr>\n<tr>\n<td>$3.00<\/td>\n<td>230<\/td>\n<td>640<\/td>\n<td>350<\/td>\n<\/tr>\n<tr>\n<td>$3.25<\/td>\n<td>250<\/td>\n<td>670<\/td>\n<td>250<\/td>\n<\/tr>\n<tr>\n<td>$3.50<\/td>\n<td>270<\/td>\n<td>700<\/td>\n<td>200<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Let&#8217;s walk through the four steps together using this example and see how the graph changes. Use the interactive graph below (Figure 2) by clicking on the arrows at the bottom of the activity to navigate through the steps.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/lumenlearning.h5p.com\/content\/1290477404078402698\/embed\" width=\"1088\" height=\"637\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><script src=\"https:\/\/lumenlearning.h5p.com\/js\/h5p-resizer.js\" charset=\"UTF-8\"><\/script><br \/>\n<strong>Figure 2 (Interactive Graph). Good Weather for Salmon Fishing: The Four-Step Process.<\/strong><\/p>\n<p id=\"fs-idm29543312\">In short, good weather conditions increased supply of the California commercial salmon. The result was a higher equilibrium quantity of salmon bought and sold in the market at a lower price.<\/p>\n<\/div>\n<div class=\"textbox exercises\">\n<h3>Exercise 2: Newspapers and the Internet<\/h3>\n<p>According to the Pew Research Center for People and the Press, more and more people, especially younger people, are getting their news from online and digital sources. The majority of U.S. adults now own smartphones or tablets, and most of those Americans say they use them in part to get the news. From 2004 to 2012, the share of Americans who reported getting their news from digital sources increased from 24 percent to 39 percent. How has this trend affected consumption of print news media and radio and television news? Figure 3 and the text below illustrate the four-step analysis used to answer this question.<\/p>\n<div id=\"attachment_13582\" style=\"width: 461px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" aria-describedby=\"caption-attachment-13582\" class=\"wp-image-13582\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/3006\/2016\/07\/10001433\/CNX_Econ_C03_01111-1024x938.jpg\" alt=\"The graph represents the four-step approach to determining changes in equilibrium price and quantity of print news. Step 1: Draw the supply curve (S sub 0) and the demand curve (D sub 0) onto the coordinate plane. The supply and demand curve intersect at the point of equilibrium (labeled E sub 0). The equilibrium point has a corresponding equilibrium price and equilibrium quantity demand, plotted on the graph on the y axis and x axis respectively with the labels P sub 0 and Q sub 0. Step 2: With an increased consumption of digital news, there is a change in demand for print news. Step 3: The change in demand for print news is negative. This decrease in demand for print news is represented by a shift the demand curve to the left. Step 4: This new demand curve (D sub 1) intersects with S sub 0 at a different point on the supply curve, creating a new, lower equilibrium price (labeled E sub 1). The corresponding new equilibrium price (P sub 1) and equilibrium quantity demanded (Q sub 1) are both lower than the original equilibrium price and equilibrium quantity demanded.\" width=\"451\" height=\"413\" \/><\/p>\n<p id=\"caption-attachment-13582\" class=\"wp-caption-text\"><strong>Figure 3. <\/strong>Graph depicting the changing market for print news.<\/p>\n<\/div>\n<p><strong>Step 1.<\/strong> Draw a demand and supply model to think about what the market looked like before the event.<\/p>\n<p>The demand curve D<sub>0<\/sub> and the supply curve S<sub>0<\/sub> show the original relationships. In this case, the curves are drawn without specific numbers on the price and quantity axis.<\/p>\n<p><strong>Step 2.<\/strong> Did the change described affect supply or demand?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><span class=\"show-answer collapsed\" style=\"cursor: pointer\" data-target=\"q225238\">Show Answer<\/span><\/p>\n<div id=\"q225238\" class=\"hidden-answer\" style=\"display: none\">A change in tastes, from traditional news sources (print, radio, and television) to digital sources, caused a change in <em>demand<\/em> for the former.<\/div>\n<\/div>\n<p><strong>Step 3.<\/strong> Was the effect on demand positive or negative?<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><span class=\"show-answer collapsed\" style=\"cursor: pointer\" data-target=\"q58864\">Show Answer<\/span><\/p>\n<div id=\"q58864\" class=\"hidden-answer\" style=\"display: none\">A shift to digital news sources tends to mean a lower quantity demanded of traditional news sources at every given price, causing the demand curve for print and other traditional news sources to shift to the left, from D<sub>0<\/sub> to D<sub>1<\/sub>.<\/div>\n<\/div>\n<p><strong>Step 4.<\/strong> Compare the new equilibrium price and quantity to the original equilibrium price.<\/p>\n<div class=\"qa-wrapper\" style=\"display: block\"><span class=\"show-answer collapsed\" style=\"cursor: pointer\" data-target=\"q5745\">Show Answer<\/span><\/p>\n<div id=\"q5745\" class=\"hidden-answer\" style=\"display: none\">The new equilibrium (E<sub>1<\/sub>) occurs at a lower quantity and a lower price than the original equilibrium (E<sub>0<\/sub>).<\/div>\n<\/div>\n<p>The decline in print news reading predates 2004. Print newspaper circulation peaked in 1973 and has declined since then due to competition from television and radio news. Fifty-five percent of Americans in 1991 indicated that they got their news from print sources, while only 29 percent did so in 2012. Radio news has followed a similar path in recent decades, with the share of Americans getting their news from radio declining from 54 percent in 1991 to 33 percent in 2012. Television news has held its own during\u00a0the last fifteen years, with the market share staying in the mid- to upper-fifties. What does this suggest for the future, given that two-thirds of Americans under 30 years old say they don&#8217;t\u00a0get their news from television at all?<\/p>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_0972dde2-e156-497a-b143-ae628da02728\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/0972dde2-e156-497a-b143-ae628da02728?iframe_resize_id=assessment_practice_id_0972dde2-e156-497a-b143-ae628da02728\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<h2>Try It<\/h2>\n<p>Play the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts, so that you can gain experience applying the concepts.<\/p>\n<p><iframe loading=\"lazy\" src=\"https:\/\/www.branchtrack.com\/projects\/evad42sx\/embed\" width=\"850\" height=\"500\" frameborder=\"0\"><\/iframe><\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-5742\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Revision and adaptation. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Food Trucks and Changes in Equilibrium. <strong>Authored by<\/strong>: Clark Aldrich for Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Macroeconomics Chapter 3.3. <strong>Authored by<\/strong>: OpenStax College. <strong>Provided by<\/strong>: Rice University. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/cnx.org\/contents\/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24\/Microeconomics\">http:\/\/cnx.org\/contents\/ea2f225e-6063-41ca-bcd8-36482e15ef65@10.31:24\/Microeconomics<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em>. <strong>License Terms<\/strong>: Download for free at http:\/\/cnx.org\/content\/col11627\/latest<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t 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