In the second lesson on linear demand equations we’ll learn how to use the equation to find the exact quantity demanded at any price. We’ll also learn what the “price-intercept” is, its significance and how it can easily be determined using the demand equation.
As we’ve learned in earlier lessons, markets tend to achieve equilibrium prices and quantities that are efficient, as the marginal benefit of a product to its consumers equals the marginal cost to producers. But what makes outcomes other than equilibrium inefficient? This lesson looks at the impact of disequilibria on consumer and producer surplus, introducing the concept of “deadweight loss” or “welfare loss”, which will further help us understand what makes outcomes other than the equilibrium quantity and price inefficient.
In the last lesson you learned how to derive a supply equation from a supply schedule or curve. In this lesson you’ll learn how to find the price-intercept of supply and learn what could cause a change in the ‘c’ and the ‘d’ variables in the supply equation and what impact this will have on a good’s supply curve.
Once you’ve learned how to calculate the areas of consumer and producer surplus on a graph when the market is in equilibrium, the next question is how so we determine the loss of total welfare when a market is out of equilibrium. This lesson shows how to find the changes in CS and PS when the price is not at the free market equilibrium and thereby determine how much welfare loss arises from a disequilibrium.
The additional benefits enjoyed by consumers pay less than they are willing to pay and by producers who sell for a price higher than they are willing to sell for are known as consumer and producer surplus. Together they make up the “total welfare” of a market. This lesson introduces and explains these concepts, important for understanding what makes the market system effective at meeting society’s wants and needs.
What does it mean for a market to be in “equilibrium”? This lesson puts demand and supply (introduced in previous lessons) together to determine what makes a market efficient or inefficient.
In a previous lesson we introduced the law of supply and the determinants of supply, but we never clearly explained WHY there is a direct relationship between price and quantity supplied. In this lesson we will connect the law of supply to a law introduced in an earlier lesson on the PPC and the Law of Increasing Opportunity Costs.
The concept of increasing marginal costs of production will be explained and the link between firms’ marginal costs and supply will be established in this lesson.
This lesson introduces the theories of supply, the law of supply and the determinants of supply in a market.
Worked solutions to a test on demand, supply and market equilibrium
Our study of market economies requires us to examine both the demand-side and the supply-side of product and resources markets. Buyers and sellers interact with one another to engage in mutually beneficial exchanges in a market economy, and prices are set based on the demand and supply for a particular good, service or resource. This video lesson presents the law of demand, and explains how the demand curve can illustrate this fundamental economic concept.
One of the many things I appreciate about economics is that it helps us better understand things in the world around us that without economic tools would seem like mysteries. For example, a few weeks ago I went for a hike with a friend who works for General Motors here in Switzerland. One perk of his job is that he gets to drive different GM cars around before they go on sale in Europe. He showed up to the hike in a 2012 Chevy Cruze. I commented on what a nice looking car it was and asked him how much it would sell for. He told me it would start aroun 17,000 francs here in Switzerland, and then he told me about Chevy’s new plug-in hybrid, the Chevy Volt, which would start at around 32,000 francs.
I decided to ask my IB students today to try and explain the price differences between the Chevy Volt and the Cruze using supply and demand analysis. In the video below, I offer my own economic analysis of the two cars. Watch the video and respond to the discussion questions that follow.
This week we will be wrapping up unit 1.1 from the IB Economics syllabus here in Zurich. The final topic to cover from this section of the course is the relationship between equilibrium in a competitive market and allocative efficiency. The video below explains why the most efficient result a market can hope to achieve occurs when the price and quantity are determined by the intersection of supply and demand. Any price and quantity combination other than that found at equilibrium will reduce overall efficiency and lead to a loss of societal welfare.
Discussion Questions about Efficiency:
- “The invisible hand of the competitive market results in a more efficient allocation of resources than prices set by a government can ever hope to achieve.” Explain the economic reasoning behind this statement.
- Why does the marginal benefit to consumers of a good decrease the greater the quantity of the good becomes available on the market? Why does the marginal cost to producers increase?
- How do competitive market forces assure resources will be efficiently allocated towards the provision of various goods and services? In other words, if the quantity in a market is not at equilibrium, why is it likely to move towards equilibrium over time?
The final video in my series of video lectures for unit 1.1 of the IB Econ course is done. Watch the video below to learn more about consumer and producer surplus.
Now that you’ve mastered demand and supply equations, it’s time to put them together to determine the equilibrium price and quantity in a market! This less shows you how to solve for equilibrium price and quantity using linear demand and supply equations.