now that we have both supply and demand separately we can bring them together in equilibrium the law of supply and demand says that market price will adjust to balance those two to equality in other words we reach one equilibrium price where quantity demanded is equal to quantity supplied let's take an example let's go back to a graph of our latte market so we had a positively sloped supply and a downward sloped demand remember the demand is downward slope because of that negative relationship with price and quantity demanded and supply is positively sloped because of the relationship the positive one between price and quantity supplied there's only one intersection point and that is our equilibrium our equilibrium price and our equilibrium quantity but remember at that equilibrium quantity quantity demanded is equal to quantity supplied in other words no additional quantities are exchanged because now the supply curve is above the demand in other words the cost of production is rising but consumers aren't willing to pay to cover those costs up to our equilibrium quantity the cost of producers was less than what consumers were willing to pay and so we reach our equilibrium in other words that invisible hand guides us to that point to match all of our consumers and all of our producers but sometimes disequilibrium in the market occurs we may have a surplus a surplus or an excess of supply occurs where the quantity supplied in a market is greater than the quantity demanded we can also have a shortage or an excess in demand where there's more quantity being demanded than there is supplied graphically let's take a supply first so again quantity and price here's my upward slope and downward slope we know our equilibrium price is pe but if we have a surplus we are at a price that is above so i'm going to call this su for surplus at a price that's above the equilibrium we look at the intersection points on our demand curve and our supply curve at this new price the quantity that is demanded is less than the quantity that is supplied now think about why a higher price encourages producers to supply more to go above what the equilibrium would a higher price encourages consumers to buy less to decrease the quantity in other words too many producers are producing and not enough consumers want to buy so we get our surplus how do we calculate the value of a surplus let's suppose that at the price psu quantity supplied is 10 and quantity demanded is four so the quantity of the surplus is simply the difference six units so there's six units that producers have made that no consumers are willing to purchase at that higher price so what's going to happen price is going to have to come down and it's going to continue to fall until it reaches that equilibrium price as price falls consumers reverse action and consume more as price falls producers decrease the quantity that they produce and will eventually come back to that equilibrium what about a shortage let's draw our graph one more time so here's my demand and supply again as a reference let's put our equilibrium price here now we're going to put a price below so let's call this psh at this new price here is your quantity supplied where the price intersects your supply curve here's your quantity demanded where the price intersects the demand curve now quantity demanded exceeds quantity supplied so there is your shortage in other words because the price is so low a lot of consumers want to buy it but because the price is so low not many producers are willing to produce it and so there's not enough to go around so we're going to see pressure on the price to rise in other words that invisible hand in action is going to put upward pressure on price encouraging producers to produce more but encourage consumers to want to buy less until we reach our equilibrium quantity once again so anytime we have a disequilibrium in the market we're eventually going to see the market correct itself that invisible hand correct itself and take us back to that equilibrium