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May 21, 2022 

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AD CURVE: The aggregate demand curve, which is a graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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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 Stage

The 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.

<= MARKET EQUILIBRIUMMARKET EQUILIBRIUM, NUMERICAL ANALYSIS =>


Recommended Citation:

MARKET EQUILIBRIUM, GRAPHICAL ANALYSIS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: May 21, 2022].


Check Out These Related Terms...

     | market equilibrium | equilibrium | market equilibrium, numerical analysis | equilibrium price | equilibrium quantity | market clearing | shortage | surplus |


Or For A Little Background...

     | demand curve | supply curve | market | demand | supply | demand price | supply price | quantity demanded | quantity supplied | law of demand | law of supply |


And For Further Study...

     | stable equilibrium | unstable equilibrium | market disequilibrium | self correction, market | disequilibrium price | comparative statics | market demand | market supply | exchange | competitive market | demand determinants | supply determinants | ceteris paribus | market-oriented economy | elasticity | utility analysis | short-run production analysis |


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