Market equilibrium, disequilibrium and changes in equilibrium (article) | Khan Academy
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Key Graphical Models – The market model
Consider the market for giant shiny salamander stickers, given in Figure
11
1
1
. Currently, the equilibrium price of these stickers is
$5\$5
$
5
dollar sign, 5
, and the equilibrium quantity is
33
3
3
.
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start text, end text
Changes in Supply
Suppose the price of glitter, which is used to make giant shiny salamander stickers, increases so that it now costs the seller
$2\$2
$
2
dollar sign, 2
more per sticker to produce them. This will cause the supply of this good to decrease. To see the impact a decrease in supply will have on the equilibrium price and quantity, grab the interactive supply curve and shift it to the left until the price is
$2\$2
$
2
dollar sign, 2
higher at every level of output (the new supply curve should start at
$4\$4
$
4
dollar sign, 4
).
What change did you notice? If you adjusted the graph correctly, you should see the equilibrium price increases to
$6\$6
$
6
dollar sign, 6
, and the equilibrium quantity in this market decreases to
22
2
2
stickers.
Now instead, suppose someone invents a new way to produce shiny salamander stickers so there is less waste and fewer resources are needed to produce them. This would result in an increase in the supply of shiny salamander stickers. To see the impact an increase in supply will have on the equilibrium price and quantity, grab the interactive supply curve and drag it to the right so that at every quantity the price is
$2\$2
$
2
dollar sign, 2
lower (the new supply curve should start at
$0\$0
$
0
dollar sign, 0
).
How did you do? If you adjusted the graph correctly, you should see the equilibrium price decreases to
$4\$4
$
4
dollar sign, 4
and equilibrium quantity increases to
44
4
4
stickers.
Changes in demand
Suppose a famous, trendsetting actress starts wearing giant shiny salamander stickers, which makes them instantly the must-have accessory. This would cause the demand for this good to increase. To see the impact on equilibrium price and quantity in the market from an increase in demand, grab the demand curve Figure
22
2
2
and shift it to the right to represent an increase in demand.
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start text, end text
Changes in both demand and supply
When both supply and demand change at the same time, the impact on equilibrium price and quantity cannot be determined for certain without knowing which changed by a greater amount.
Suppose shiny salamander stickers fall out of popularity, and therefore the demand for them decreases. At the same time, the price of glitter goes up, which leads to a decrease in supply.
On the one hand, the decrease in demand should make price decrease and quantity demanded decrease.On the other hand, the decrease in supply should also make price __increase and quantity demanded decrease. That means we know for certain that the quantity of giant shiny salamander stickers will decrease. But what will happen to price?
In Figure 3, we see a decrease in supply and a decrease in demand. The effect on quantity is easy to determine (quantity will definitely decrease). On the other hand, it is hard to tell if the equilibrium price has increased, decreased, or stays the same. Because we cannot say which of these has happened with certainty, we say that the price change is indeterminate or ambiguous.
Figure 3: The market for giant shiny salamander stickers
Of course, when modeling changes in a graph it is possible to see changes in both equilibrium price and quantity when shifting both demand and supply (depending on how much each curve shifts). In the interactive graph below, move both demand and supply in different directions. Each time, move the equilibrium point to the new intersection of demand and supply. Try to create new equilibria at which:
- Price is higher and quantity is higher
- Price is higher and quantity is lower
- Price is lower and quantity is higher
- Price is lower and quantity is lower
