Lecture Notes: Supply and Demand Equilibrium

Key Concepts

• Demand Curve: Represents willingness to pay and serves as the marginal benefit curve.
• Supply Curve: Represents willingness to accept and serves as the marginal cost curve.
• Equilibrium:
  • The point where the supply and demand curves intersect.
  • Quantity supplied equals quantity demanded.
  • No pressure for change in the market.

Equilibrium in Action

• Example: Tacos
  • Equilibrium Point: Price is $3, quantity is 100 tacos.
  • Explanation: Willingness to pay equals willingness to accept at this point.

Price Variations and Market Reactions

• Below Equilibrium Price ($2):

  • Shortage: Demand exceeds supply
  • Reaction:
    • Prices rise due to increased demand.
    • Sellers willing to increase production at higher prices.
    • Result: Prices increase until equilibrium is reached.

• Above Equilibrium Price ($4):

  • Surplus: Supply exceeds demand
  • Reaction:
    • Prices are reduced to attract more buyers.
    • Result: Prices decrease until equilibrium is reached.

Gains from Trade

• When Marginal Benefit > Marginal Cost:

  • Buyers are willing to pay more than sellers are willing to accept.
  • Outcome: Gains from trade occur.

• When Marginal Benefit < Marginal Cost:

  • Buyers are not willing to pay the higher price set by sellers.
  • Outcome: No trade occurs as it's not rational for buyers.

Conclusion

• Equilibrium Point: Occurs where marginal benefit equals marginal cost.
• Importance: Central to understanding market dynamics and is fundamental for the rest of the course.
• Upcoming: Numerical example to illustrate these concepts.

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