1) background

Microeconomics includes examination of “markets”—places (whether physical or online) where

goods1 are exchanged between buyers and sellers (a.k.a. consumers and producers)—though it
also includes other topics beyond the scope of this book (e.g., most of game theory).
Fundamental to the study of markets are the questions: How much of a given good will
consumers purchase? At what price(s)? And how are those quantities and prices a ected by other
factors?. Each of us has limited resources. We have neither the time nor the money to do
everything we might want to do. So we must choose: Out of all the possible options, on what will
we spend our money and time?

Economics is the study of how people make these decisions. It asks how individuals, families,
businesses, and governments decide how to allocate their limited (i.e., scarce) resources. In other
words, economics is the study of how people deal with scarcity.

Economics is also concerned with incentives and their impact on behavior. Because we each
have scarce resources (e.g., money), we’re naturally motivated by the prospect of acquiring more
resources. Economics looks at how this motivation to acquire more resources a ects the
decisions we make.

1.2 WRITING PURPOSE

➢ Knowing the meaning of Market Equilibrium means according to the expert

➢ Knowing the Supply and Demand Theory according to the expert

➢ To inform readers about Market Equalibrium in economics is according to the expert

1.3 THE BENEFITS OF WRITING

➢ To ful ll English for Economics Course assignments

➢ nd out the information contained in Market Equilibrium

➢ Train yourself to Economic Thinking

➢ The readers will understand about combining supply and demand consumer choice gains from
trade.

2) explanation
2.1 The Meaning of Market Equilibrium
When you plot a good’s market demand curve and market supply curve on the same graph, the
point at which the curves meet is especially important. At this price (known as the “equilibrium
price”), the quantity of the good that producers are willing to supply is equal to the quantity of the
good that consumers are willing to buy. This quantity is known as the “equilibrium quantity.” This
point—the point at which quantity supplied and quantity demanded are equal—is referred to as
the “equilibrium point.”

Market equilibrium is a desirable outcome. It means that everybody who wants to buy the good at
its current price is able to nd somebody to sell it to them, and it means that everybody who
wants to supply the good at its current price is able to nd somebody to buy their product. This is
also referred to as a “market clearing” outcome. How Market Equilibrium Is Reached

In a market in which buyers and sellers are permitted to act without constraints (often called a
“free market”) their actions drive the price and quantity of a good toward market equilibrium.

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 2.2 Supply theory
The “supply” for a good is how much of that good producers would produce at various prices.
Like demand, supply is often illustrated via a graph—known as a “supply curve” in this case. One
can draw a supply curve for an individual producer, just as one can draw a demand curve for an
individual consumer. Similarly, one can aggregate across all producers of the same good (or very
similar goods) to get a market supply curve.

EXAMPLE: The following hypothetical supply curve shows how many frozen pizzas Pauline’s Pies
would produce at various prices. As with demand curves, supply curves can be read in either
direction. That is, in addition to showing how much suppliers would produce at a given price,
supply curves show how much producers must be paid (per unit) to produce a given quantity. For
example, this supply curve not only shows that Pauline would produce 1,000 frozen pizzas per
month at $6 per pizza, it also shows that a price of $6 per pizza is the minimum that Pauline
would need to be paid in order to produce 1,000 pizzas per month.

“Change in Supply” as Opposed to “Change in Quantity Supplied”

When the price of a good changes, the resulting change in how much of it producers want to
produce is said to be a “change in the quantity supplied.” Such changes are indicated by
movements along the good’s supply curve.

In contrast, a “change in supply” is a shift of the supply curve, caused by changes in factors other
than the good’s price. For example, an increase in supply would be shown as a shift of the supply
curve to the right, indicating that at every price, suppliers would produce more of the good than
they previously produced at that price. Said di erently, producers would be willing to accept a
lower price for any quantity.

How Costs A ect Supply

Generally, to entice a rm to produce a given quantity of a good, you must pay the rm an amount
su cient to cover its costs of production.

EXAMPLE: Pauline’s Pies can produce 1,000 frozen pizzas per month, at a cost of $6,000 (i.e., $6
per pizza). So, at an output level of 1,000 pizzas per month, what is the very lowest price that
Pauline would be willing to accept? $6 per pizza.

If Pauline has her employees work overtime every day, the business can produce 1,500 pizzas per
month. But, because Pauline pays her workers “time and a half” for overtime, her cost per pizza
would rise to $8. In other words, in order to entice Pauline to produce 1,500 pizzas per month,
consumers would have to pay her $8 per pizza.

As you can see, Pauline’s supply curve for frozen pizzas is upward sloping. That is, the business
requires a higher price per unit in order to produce a higher level of output.

The “marginal cost of production” for a good is the additional cost that must be incurred in order
to produce one more unit of the good. The supply curves for most goods are upward sloping
because most industries face “increasing marginal costs of production,” meaning that each
additional unit of production costs more than the unit before (as is the case with Pauline’s
production of pizzas).

Chapter 4 Simple Summary of supply

• A good’s supply curve shows the quantity producers would produce at various prices.

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• A good’s marginal cost of production is the additional cost that must be incurred to produce one
additional unit of the good.

• Most supply curves are upward sloping because most goods have increasing marginal costs of
production.

• When supply for a good is elastic, the amount producers will produce is more sensitive to price
changes. When supply for a good is inelastic, the amount producers will make is less sensitive to
prices changes.

• A movement along the supply curve due to a change in price is a change in the quantity
supplied. A shift of the supply curve is a change in supply due to changes in factors other than
the good’s price.

• Supply can change in response to changes in any of several factors: costs of production,
opportunity costs, supplier expectations, or the number of suppliers.

Demand theory
The “demand” for a good is simply how much of that good consumers would buy at various
prices. Demand is often illustrated using a graph known as a “demand curve.” (It’s referred to as a
curve even when the graph is a straight line.)

EXAMPLE: The following is Bob’s monthly demand curve for frozen pizza. Note that demand
curves can be read in either direction. That is, in addition to showing how many frozen pizzas Bob
would buy per month at a given price, this demand curve also shows how much Bob would be
willing to pay per pizza for a given number of pizzas. For example, Bob would be willing to pay $4
per pizza for 4 pizzas per month.

In addition to graphing an individual’s demand curve for a good, we can graph the market
demand curve for a good, which would show how much of that good would be purchased,
collectively, by everyone at each unit price. The market demand for a good is simply the
aggregate (or sum) of every individual consumer’s demand for that good.

Change in Demand” as Opposed to “Change in Quantity Demanded”

When the price of a good changes, the resulting change in how much of it people want to buy is
referred to as a “change in the quantity demanded.” Such changes are indicated by a movement
along the good’s demand curve.

In contrast, a “change in demand” is a shift of the demand curve, caused by changes in factors
other than the good’s price. A decrease in demand is a shift of the demand curve to the left,
meaning that, at any given price, consumers would demand less of the good than they demanded
at that price previously. Conversely, an increase in demand is a shift of the demand curve to the
right, meaning that at any given price, consumers would demand more of the good than they
would have demanded at that price in the past.

Simple Summary of demand

The demand curve for a product shows the quantity of that product that consumers would buy at
various prices.

 When demand for a good is elastic, the quantity that consumers want to buy is more sensitive to
price changes. When demand for a good is inelastic, the quantity purchased is less sensitive to
price changes.

A change in the quantity demanded is a movement along the demand curve due to a price
change. A change in demand is a shift of the demand curve due to changes in factors other than
the price of the good.

Demand can change in response to changes in factors such as consumer preferences, income
levels, expectations, number of buyers in the market, and prices of other goods.

When the price of a good goes up, demand for its substitutes goes up and demand for its
complements goes down.

The E ect of Changes in Supply and Demand

When we graph a good’s supply and demand together, not only can we determine the market
equilibrium price and quantity, we can also determine how the equilibrium changes when supply
or demand for the good changes.

EXAMPLE: Figure 5.3 shows the e ect of an increase in demand. When the demand curve shifts
to the right (from D1 to D2), it intersects the supply curve

(S) at a di erent point. That is, the price of the good increases (from P1 to P2), as does the
equilibrium quantity (from Q1 to Q2).

Conversely, when demand decreases, the demand curve shifts to the left (e.g., from D2 to D1 in
the previous graph), and there is a decrease in the equilibrium

price of the good (from P2 to P1) and in the equilibrium quantity (from Q2 to Q1).

EXAMPLE: When the supply for a good increases, as in Figure 5.4 (from S1 to S2), there is an
increase in the equilibrium quantity (from Q1 to Q2), but a decrease in the equilibrium price (from
P1 to P2).

Figure 5.4: Market Equilibrium and Supply Shift


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 Simple Summary of supply
• At the market equilibrium point for a good, quantity supplied and quantity demanded are equal.

• Unconstrained buyers and sellers acting in their best interests drive a market to equilibrium.

• A shift in demand or supply a ects both the equilibrium price and quantity of a good. The
easiest way to determine the e ect is to sketch a graph with the original and shifted curves.

CHAPTER III
CLOSING
 

3.1 Conclusion

The market equilibrium is also called the competitive equilibrium, because it describes the
allocation of goods and services in a perfectly competitive market (see the term for Perfect
Competition). In a competitive market where buyers and sellers are price takers, the equilibrium
price (and thus marginal revenue) will be equal to marginal costs and each rm makes a pro t of
zero.

3.2 Suggestion

To nd out the market equilibrium, it is necessary to study the public supply and demand for a
product or service. So a company or community must understand the price and market

equalibrium that occurs.

bibliography

- Economics: A Very Short Introduction, by Partha Dasgupta Economics For Dummies, by Sean
Flynn, PhD

- Modern Principles: Microeconomics, by Tyler Cowen and Alex Tabarrok

Microeconomics Made Simple:

- Basic Microeconomic Principles Explained in 100 Pages or Less

Austin Frakt, PhD Mike Piper, CPA

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