• equilibrium price (market-clearing price): the price where the intentions of buyers and sellers are balanced
  • Quantity Demanded (Qd) = Quantity Supplied (Qs). This is the most efficient allocation of resources.
    
  • on a graph, it is the intersection of the supply and demand curves
  • changes as a result of a shift in the supply or demand curve
  • competition among buyers and sellers drive prices to the equilibrium price
  • there is a surplus of products when the quantity supplied exceeds the quantity demanded (imagine an overflowing amount of goods on the shelves of stores)
  1. occurs when producing above the equilibrium point
  2. Often occurs as a result of a price floor, as long as the price floor is set above equilibrium price.
     
  • there is a shortage of products when the quantity supplied is less than the quantity demanded (imagine that there's nothing on the shelves of stores)
  1. Producing below the equilibrium point
  2. Often occurs as a result of a price ceiling, as long as the price ceiling is set below equilibrium price.
     
• equilibrium quantity- the quantity demanded/supplied at the equilibrium price and there is no shortage or surplus of a product (Intersection of the demand and supply curves)

• Example: the equilibrium price in the graph to the right is $3. This means that at $3, there will be no surplus for the sellers and no shortages for the buyers.
  • All buyers willing and able to pay $3 for a bushel of corn will get it, and those who cannot or will not pay $3 will not get corn.
  • All producers willing and able to sell a bushel of corn for $3 will sell it, and those who cannot or will not sell $3 will not sell their product.
  • This equilibrium (market-clearing) price is established by the combination of freely made individual decisions.
    

• Productive efficiency - production of a product using least-cost methods
  • Allows the greatest conservation of resources to be used in other desired goods
    • Ex: Producing a bushel of corn for $3 of resources instead of $5 of resources so there are more resources for alternative uses.
• Allocative Efficiency - particular mix of goods and services most desired by society, assuming minimum-cost production
  • Ex: Using high-quality mineral water for bottled water rather than for refrigeration ice; manufacturing MP3s instead of cassettes
  • Society also diversify its use of resources to maintain food, energy, and consumer goods level

• an increase in demand raises both equilibrium price and equilibrium quantity.
• a decrease in demand reduces both equilibrium price and equilibrium quantity.

• an increase in supply reduces equilibrium price but increases equilibrium quantity,
• a decrease in supply raises equilibrium price, but decreases equilibrium quantity.

• price drop is even greater than if there was only one change
• increase in supply > decrease in demand results in equilibrium quantity increase
• increase in supply < decrease in demand results in equilibrium quantity decrease

• price rise is even greater than if there was only one change
• decrease in supply > increase in demand results in equilibrium quantity decrease
• decrease in supply < increase in demand results in equilibrium quantity increase

• increase in supply > increase in demand results in equilibrium price decrease
• increase in supply < increase in demand results in equilibrium price increase
• rise in equilibrium quantity is greater than caused by either change alone

• decrease in supply > decrease in demand results in rise of equilibrium price
• decrease in supply < decrease in demand results in fall of equilibrium price
• fall in equilibrium quantity is greater than caused by either change alone