Lecture Notes: Market for Pizza

Market Demand and Supply Curves

• Market Demand Curve:
  • Equation: Quantity Demanded (QD) = 1000 - 100P
  • Graph: When P = 0, QD = 1000
• Market Supply Curve:
  • Equation: Quantity Supplied (QS) = 100P
  • Graph: When P = 10, QS = 1000

Equilibrium Price and Quantity

• Equilibrium Condition: Quantity Supplied = Quantity Demanded
• Equations:
  • QS = 100P
  • QD = 1000 - 100P
• Solving for Equilibrium:
  • Set 100P = 1000 - 100P
  • Adding 100P to both sides: 200P = 1000
  • Dividing by 200: P = 5
  • Plug into equations:
    • QS = 100 x 5 = 500
    • QD = 1000 - 100 x 5 = 500
• Result:
  • Equilibrium Price: $5
  • Equilibrium Quantity: 500 pizzas

Surpluses and Shortages

• If Price = $6:
  • QD = 400, QS = 600
  • Surplus: 200 pizzas (QS > QD)
• If Price = $5.50:
  • QD = 450, QS = 550
  • Surplus: 100 pizzas
  • Prices will decrease to restore equilibrium
• If Price = $3:
  • QD = 700, QS = 300
  • Shortage: 400 pizzas (QD > QS)
  • Prices will increase until shortage is eliminated

Key Concepts

• Equilibrium: The point where QS = QD
• Surpluses: Occur when QS > QD
• Shortages: Occur when QD > QS
• Price Adjustments:
  • Prices decrease when there is a surplus
  • Prices increase when there is a shortage
• Marginal Benefit vs. Marginal Cost:
  • Equilibrium is achieved where the marginal benefit of buying equals the marginal cost of supplying.