S U P P LY A N D D E M A N D L E A D S T O E Q U I L I B R I U M

E Q U I L I B R I U M

• The point where Supply and Demand intersect

• The Market Clearing Price

• Quantity Demanded equals the Quantity Supplied

D I S E Q U I L I B R I U M

• When the price is too high or too low, then the market is not in equilibrium

• This leads to shortages and surpluses

• The Quantity Demanded is no longer equal to the Quantity Supplied.

• This puts pressure on price to restore equilibrium, a la the Invisible Hand.

S H O RTA G E

• When prices are too low, the Quantity Demanded is greater than the Quantity Supplied.

S U R P L U S

• When the prices are too high, the Quantity Demanded is less than the Quantity Supplied.

P R I C E E F F E C T P R O B L E M S

• What happens when the price of ice cream rises, given ceteris paribus?

• What happens when the price of gasoline decreases, given ceteris paribus?

• Assuming ceteris paribus, if the quantity of cookies demanded decreased, what happened to the price?

• Assuming ceteris paribus, if the quantity of Coca-Cola supplied to the market increases, what happened to the price of Coca-Cola?