Interpretation of equilibrium using demand and supply schedules

1. Introduction to Price Determination

In a market economy, the price of a good or service is determined by the interaction of demand and supply. The point at which the quantity demanded equals the quantity supplied is called the equilibrium. Understanding how to read and interpret demand‑ and supply‑schedules is essential for analysing market outcomes.

2. Demand Schedule

A demand schedule shows the quantity of a good that consumers are willing and able to buy at different price levels, holding all other factors constant (ceteris paribus).

3. Supply Schedule

A supply schedule shows the quantity of a good that producers are willing and able to sell at different price levels, again holding other factors constant.

4. Finding the Equilibrium

To locate the equilibrium price and quantity, compare the two schedules and identify the price at which the quantity demanded equals the quantity supplied.

1. Match each price level from the demand schedule with the corresponding quantity supplied from the supply schedule.
2. Identify the price where the two quantities are equal.

From the tables above:

• At $8, Quantity Demanded = 110 units and Quantity Supplied = 90 units (excess demand).
• At $6, Quantity Demanded = 130 units and Quantity Supplied = 70 units (still excess demand).
• At $4, Quantity Demanded = 150 units and Quantity Supplied = 50 units (excess demand).
• At $2, Quantity Demanded = 170 units and Quantity Supplied = 30 units (excess demand).
• At $10, Quantity Demanded = 90 units and Quantity Supplied = 110 units (excess supply).

Because none of the listed prices give an exact match, we can interpolate to estimate the equilibrium. The closest point where excess demand switches to excess supply is between \$8 and \$10.

Assuming a linear relationship, the equilibrium price (\$P^*\$) and quantity (\$Q^*\$) can be approximated by solving:

\$\$\begin{aligned}

Q_D &= 130 - 10P \\

Q_S &= 30 + 20P \\

\text{Set } QD = QS &: \;130 - 10P = 30 + 20P \\

100 &= 30P \\

P^* &= \frac{100}{30} \approx 3.33 \\

Q^* &= 130 - 10(3.33) \approx 96.7 \text{ units}

\end{aligned}\$\$

Thus, the estimated equilibrium price is about $3.33 and the equilibrium quantity is roughly 97 units.

5. Interpretation of Equilibrium

At the equilibrium price:

• There is no tendency for the price to change because the amount consumers want to buy exactly equals the amount producers want to sell.
• Resources are allocated efficiently – every unit that is produced is purchased by a consumer who values it at least as much as the cost of production.
• Any deviation from this price creates a surplus (if price is above \$P^*\$) or a shortage (if price is below \$P^*\$), prompting market forces to push the price back toward equilibrium.

6. Practice Exercise

Use the following schedules to determine the equilibrium price and quantity. Show your working.

Answer:

• Equilibrium price = $10
• Equilibrium quantity = 60 units

7. Suggested Diagram