At what price is the quantity supplied and the quantity demanded the same?

Let’s go back to Fred and Jill, and the willingness to buy and sell chickens. We know that Fred’s willingness to buy chicken depends upon the price he’s asked to pay; we also know that Jill’s willingness to sell chicken depends on the price she’s offered.

It’s time for another assumption. Let’s assume that there are lots of chicken buyers whose actions, when added together, result in the demand curve on the right.   Also, there are lots of chicken sellers whose actions, when added together, result in the supply curve on the right. Obviously, the quantities are in large numbers (e.g. thousands of pounds per week).

EXCESS DEMAND

What would happen if the price were a $1.00 per lb? Buyers really like that idea – they are willing to buy 5 lbs of chicken per week. But, they’re going to have a lot of trouble finding chicken to buy at that price because sellers are willing to sell only 1 lb of chicken per week. That leaves a lot of unhappy chicken-eaters out there (everyone in the shaded area - see left).

Economists call this an “excess demand” – the quantity demanded is greater than the quantity supplied at the given price.   This is also called a shortage.

EXCESS SUPPLY

Now, sellers don’t like the idea of $1.00 per week at all. They’d go out of business at that price! So, they decided to get together and demand that buyer pay $4.00 per lb of chicken. At that price, they’d be willing (even delighted) to offer 4 (thousand) lbs per week.

However, many of the buyers have disappeared (the shaded area - see right)!   They’ve substituted other food for chicken – at $4.00 per lb, their only willing to buy 2 lbs each week.   After all, at $4.00 per lb, they might as well buy steak.

Economists call this situation an “excess supply” – that is the quantity demanded is less than the quantity supplied at the given price.   This is also called a surplus.

So, if the price is too high, sellers will have leftover chickens. And, if the price is too low, buyers won’t be able to find as much chicken as they want.   In either case, the market participants will be disappointed.

However, what happens if the price is $3.00 per lb?   Buyers are willing to buy 3 lbs of chicken per week and sellers are willing to sell 3 lbs of chicken per week.   Wow! No leftover chickens and no unhappy consumers.

Your text explains the process of reaching equilibrium – you should read it carefully.   This tutorial will help you learn to use graphical analysis to solve problems; it is not a substitute for your text.

SUMMARY

Summary so far...

• Equilibrium: the quantity people are willing to buy equals the quantity people are willing to sell at each price.
• Excess Demand: the quantity demanded is greater than the quantity supplied at the given price.   This is also called a shortage.
• Excess Supply: the quantity demanded is less than the quantity supplied at the given price.   This is also called a surplus.

SUMMARY EXERCISE

Suppose consumers convince their legislators that the price of chicken is too high, and since such a nutritious food should be available for everybody, the price must be set by law. Which side of the market changes?

The legislature decreased the price of chicken, and it is sold at the new price represented by Qs (see right). Only Qs is available at the new, low price, and there certainly won't be enough to go around since people want to buy Qd pounds per week. At this price, quantity demanded is much greater than quantity supplied. This is a strange way to make more nutritious food available to more people!

EQUILIBRIUM SHIFT IN DEMAND

We investigated some of the reasons why the demand curve would change in the demand section. Let’s see what happens to the price and quantity of chicken now when the price of corn goes down.

First, the demand for chicken increases as many people buy more chicken to go with their corn. Drag the demand curve to show and increase in demand.

Look at the graph carefully.   At $3.00 per lb, buyers now want to buy 5 lbs of chicken per week. Too bad – the chicken just isn’t there. The demand increased but the supply did not – sellers are willing to sell the same amount of chicken at $3.00 per lb as they were before the corn price changed.

As the buyers try to buy more chicken they offer the sellers more money. After all, they like chicken more than they did last week.

As the buyers offer more money, the sellers realize that they can afford to raise more chickens.

This process stops when the willingness to buy chicken equals the willingness to sell chicken at the current price.   On this graph, that seems to be about 4 lbs at about $4.00 per lb. Verify this with the table. At $4.00, Qd’ is 4 (Demand Table) and quantity is 4 on the supply table.

EQUILIBRIUM SHIFT IN DEMAND - EXERCISE

Suppose a famous TV cooking instructor produces a series called “101 Ways to Cook Chicken.” It’s a big hit, and people increase their consumption of chicken.   What changes in the chicken market?  

Demand increases. The new equilibrium is indicated on the graph (see left).

EQUILIBRIUM SHIFT IN SUPPLY

We investigated some of the reasons why the supply curve would change in the supply section. Now, let’s see what happens to the price and quantity of chicken now when the price of feed goes up.

First, the supply of chicken decreases as sellers find it more expensive to raise chickens. Look at the graph carefully.   Notice that the price of chicken hasn’t risen so that sellers now want to sell only 1 lb of chicken per week. But buyers are willing to buy 3 lbs of chicken at $3.00 per pound.   There are a lot of unhappy chicken-eaters out there!   They want more chicken, and they’re willing to pay for it.

As the buyers offer more money, the sellers realize they can afford to sell more chicken. This process stops when the willingness to buy chicken equals the willingness to sell chicken at the current price. On the graph, that seems to be about 2 lbs at about $4.00 per lb.

EQUILIBRIUM SHIFT IN SUPPLY - EXERCISE

Let’s see what happens when refrigerated railroad cars become available for shipping chicken to market.   If you remember, from the supply section, this decreased the costs of production and increased supply. The graph on the left illustrates the change in supply and the new equilibrium.

EXERCISE 1

Remember the babysitters? Let’s look at them again. There’s a new, hit play in town for only two nights. Everyone wants to see it but it’s not really suitable for children. What changes in the babysitter market?  

The demand increases. The graph on the right illustrates the change in demand and the new equilibrium.

EXERCISE 2

Gizmo Corporation just signed a new contract with its labor union. Wages have gone up! Which segment of the Gizmo market is affected?

The supply increases. Gizmo corporation is willing to sell fewer Gizmos at each price now that wages have risen. The graph on the left illustrates the new equilibrium, where the willingness buyers to buy Gizmos equals the willingness of sellers to sell Gizmos.

EXERCISE 3

The price of donuts just went up and the guys aren’t stopping at the donut shop for coffee and donuts anymore. Which segment of the coffee market changes?

The demand for coffee decreased because coffee and donuts are compliments. The graph on the right illustrates the new equilibrium.

EXERCISE 4

There was a freeze in the Sunbelt and many crops were damaged. What do you think happened to the price and quantity of oranges? First, which segment of the market was affected?

Sellers are willing to sell more oranges at each price. This is an increase in supply. The graph on the left illustrates the new equilibrium, where the willingness buyers to buy oranges equals the willingness of sellers to sell oranges.

EXERCISE 5

Winter is on the way, and forecasters are predicting snow. What do you think will happen to the price and quantity of snow blowers? Which segment of the market for snow blowers was affected?

This is an increase in demand. People are more willing to buy more snow blowers at each price because expectations have changed. The graph on the right illustrates the new equilibrium, where the willingness buyers to buy snow blowers equals the willingness of sellers to sell snow blowers.

EXERCISE 6

Suppose, now, that people get angry and accuse the snow blower sellers of price gouging. The politicians, never ones to let pass an opportunity to serve the voters, enact a law rolling back the price of snow blowers (to the old equilibrium price). What happens next?

The graph on the left shows the new equilibrium. Again the political solution leads to fewer snowblowers available for purchase. The lower price has the opposite result to what was intended. The shaded area is the shortage of snowblowers. After all, at the higher price, Qe' (the new equilibrium quantity) would have been offered for sale; now only Qs' is available.

EXERCISE 7

”Milk is nature’s most nearly perfect food,” so why not have the government establish a low enough price so that everyone can afford it? What part of the market for milk would be affected by such a plan?

The price. The willingness of buyers to buy and sellers to sell at each price has not changed - only the price has changed. Qs', as illustrated by the chart on the left, shows how many apartments will be for rent. At the controlled, low price of housing, people want additional housing (kids move away from home, people move in and from other places, etc.). At the same time, owners are less willing to rent - they may allow their relatives to live there, they may stop maintenance, they certainly won't build additional housing. The shaded area is the excess demand for housing - the homeless.

At what price would quantity demanded and quantity supplied be equal?

Is quantity supplied and quantity demanded the same?

What is it called when supply and demand are the same?