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ModULE 1.6
                    Finding the Equilibrium Price and Quantity                                        AP  ECoN TIP
                                                                                                         ®
                    The easiest way to determine the equilibrium price and quantity in a market is by   Equilibrium price and
                    putting the supply curve and the demand curve on the same diagram. Since the   quantity are found where the
                    supply curve shows the quantity supplied at any given price and the demand curve   supply and demand curves
                    shows the quantity demanded at any given price, the price at which the two curves   intersect on the graph, but
                    cross is the equilibrium price: the price at which quantity supplied equals quantity   the values for price and
                    demanded.                                                                   quantity must be shown
                       Figure 1.6-1 shows supply and demand curves for a hypothetical lumber market.   on the axes. Points labeled
                    The supply and demand curves intersect at point E, which is the equilibrium of this   inside the graph do not
                    market; $1 is the equilibrium price, and 100 billion board feet is the equilibrium quan-  show equilibrium price and
                    tity. Let’s confirm that point E fits our definition of equilibrium. At a price of $1 per   quantity.
                    board foot, farmers are willing to sell 100 billion board feet of lumber, and lumber
                    consumers want to buy 100 billion board feet. So at the price of $1 per board foot, the
                    quantity of lumber supplied equals the quantity demanded. Notice that at any other
                    price, the market would not clear: some willing buyers would not be able to find a will-
                    ing seller, or vice versa. More specifically, if the price were more than $1, the quantity
                    supplied would exceed the quantity demanded; if the price were less than $1, the quan-
                    tity demanded would exceed the quantity supplied.



                    FIGURE 1.6-1    Market Equilibrium

                         Price of
                         lumber
                      (per board foot)
                                                         Supply
                              $2.00

                               1.75
                               1.50

                               1.25
                    Equilibrium  1.00                  E    Equilibrium
                    price
                               0.75                                                             Market equilibrium occurs at
                                                                                                point E, where the supply curve
                               0.50                                   Demand                    and the demand curve intersect.
                                                                                                In equilibrium, the quantity
                                                                                                demanded is equal to the quantity
                                  0       70         100        130    150    170               supplied. In this market, $1 is the
                                                                 Quantity of lumber             equilibrium price, and 100 bil-
                                                  Equilibrium  (billions of board feet)         lion board feet is the equilibrium
                                                  quantity                                      quantity.




                       The model of supply and demand, then, predicts that given the demand and supply
                    curves shown in Figure 1.6-1, 100 billion board feet of lumber would change hands at
                    a price of $1 per board foot. But how can we be sure that the market will arrive at the
                    equilibrium price?
                    Why do All Sales and Purchases in a Market Take
                    Place at the Same Price?
                    There are some markets where the same good can sell for many different prices,
                    depending on who is selling or who is buying. For example, have you ever bought a
                    souvenir in a popular tourist destination and then seen the same item on sale some-
                    where else (perhaps even in the shop next door) for a lower price? Because tourists

                                                 Module 1.6  Market Equilibrium,  Disequilibrium, and Changes in Equilibrium  47
                                              Copyright © Bedford, Freeman & Worth Publishers.
                                 Strictly for use with its products. For review purposes only. Not for redistribution.




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