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CIRCULAR FLOW: The continuous movement of production, income, and resources between producers and consumers. This flow moves through product markets as the gross domestic product of our economy and is then the revenue received by the business sector in payment for this production. This stream of revenue then flows through resource markets as payments by businesses for the resources employed in production. The payments received by resource owners, however, is nothing more than the income of the household sector. The resource owners of the household sector use this income to purchase goods and services through the product markets, coming full circle to where we began.
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                           MARKET EQUILIBRIUM, GRAPHICAL ANALYSIS: An analysis of market equilibrium using a graph that combines a demand curve and a supply curve. A graphical analysis of the market is used to ascertain information such as market equilibrium, equilibrium price, equilibrium quantity, shortage, and surplus. This is one of two basic methods of analyzing market equilibrium. The other is a numerical analysis using demand and supply schedules. A graphical analysis of the market combines the demand curve, which captures the demand side, with a corresponding supply curve, which illustrates the supply side. It is a powerful tool for the economic analysis of market exchanges. However, it also forms the foundation for analyzing all sorts of market-based phenomena, including market adjustment, price floors, price ceilings, tax incidence, minimum wages, externalities, market control, monopoly, regulations, public goods, and... a whole lot more. Setting the StageThe location of the market to be studied is the Shady Valley Exposition Center. The event is the 88th Annual Trackmania 8-Track Tape Collectors Convention. The purpose is the exchange of 8-track music tapes filled with the works of classic performers such as The Carpenters and Englebert Humperdink. The Center is filled with 8-track buyers and 8-track sellers.| The 8-Track Tape Market |  |
Although the information takes a little time to compile, the buying and selling inclinations of these "tracksters" can be illustrated by a graph that combines the buyers' demand curve with the sellers' supply curve. The graph in the exhibit at the right is the result.A few observations about this graph are in order: - First, the demand curve is negatively sloped--higher prices correspond with smaller quantities. This negative slope indicates the law of demand.
Moving along the demand curve, a 90-cent price generates a quantity demanded of 0 tapes. A 10-cent price, in contrast, leads to a quantity demanded of 800 tapes.
- Second, the supply curve is positively sloped--higher prices correspond with larger quantities. This positive slope indicates the law of supply.
Moving along the supply curve, a 10-cent price generates a quantity supplied of 0 tapes and a 90-cent price gives us a quantity supplied of 800 tapes.
What If?To while away the time, it might be interesting to play the economic game of "What if?" That is, what occurs if the market price is 30 cents, 50 cents, 70 cents, or some other price?- 30 Cents: Consider first a 30 cent. Click the [30 Cent] button to highlight this price. At this price, the quantity demanded is 600 tapes and the quantity supplied is 200 tapes. This does not seem to be equilibrium. The buyers cannot buy all that they want. They want to buy 600 tapes, but only 200 tapes are offered for sale by the sellers. This situation, termed a shortage, actually motivates buyers to change the price, to offer a higher price. But equilibrium means that the price does not change. This price is NOT equilibrium.
- 70 Cents: Now consider a 70 cent. Click the [70 Cent] button to highlight this price. At this price, the quantity demanded is 200 tapes and the quantity supplied is 600 tapes. This does not seem to be equilibrium, either. But now the sellers cannot sell all that they want. They want to sell 600 tapes, but only 200 tapes are purchased by the buyers. This situation, termed a surplus, motivates sellers to change the price, to charge a lower price. But once again, equilibrium means that the price does not change. This price is NOT equilibrium either.
Neither price is suitable. Either the buyers are not able to buy what they want or the sellers are not able to sell what they have. This market is not in equilibrium at either price. One side or the other is left wanting, which prompts the unsatisfied side to take corrective action, action that alters the price. A changing price is a sure sign that the market is not at equilibrium. Equilibrium?If a 30 cent price is so low that it triggers a price increase and a 70 cent price is so high that it triggers a price decrease, then perhaps a price between these two would achieve an equilibrium balance.What about a 50 cent price? Click the [50 Cent] button to highlight this price. At this price, the demand curve and supply curve intersect. The quantity demanded is 400 tapes and the quantity supplied is 400 tapes. This looks promising. The buyers can buy all that they want. The sellers can sell all that they want. Neither buyers nor sellers are motivated to change the price. The forces of demand and supply appear to be in balance. As a matter of fact, the 50 cent price IS the equilibrium price. At 50 cents, the quantity demanded is equal to the quantity supplied. This is the ONLY price that achieves a balance between these two quantities. Best of all, because this is equilibrium, the equilibrium price of 50 cents does not change and the equilibrium quantity of 400 tapes does not change unless or until an external force intervenes.
Recommended Citation:MARKET EQUILIBRIUM, GRAPHICAL ANALYSIS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2026. [Accessed: February 8, 2026].
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Post WWI induced hyperinflation in German in the early 1900s raised prices by 726 million times from 1918 to 1923.
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