COMM1100 Chap.4 Demand, Supply and Market Equilibrium
Demand, Supply and Market Equilibrium
The competitive market model is the workhorse of the economics half of COMM1100. Buyers and sellers are price takers, each buyer compares a reservation price with the market price, and each seller does the same with marginal cost.
Adding up their choices gives market demand and market supply, and the price at which the two are equal is the equilibrium.
This chapter builds market curves by horizontal summation, solves for equilibrium algebraically, and drills the most tested skill of Weeks 2 and 3: deciding whether an event shifts demand or supply, which way, and what happens to price and quantity, including when two events happen at once.
Business decisions often start with a question this model answers directly: if a cost, a rival or a customer group changes, what happens to the price we can charge and the volume we can sell?
Being able to draw the shift and say which variable is certain is a skill the case study rewards as much as the tests do.
What this chapter covers
- 01
Competitive markets and price takers
- 02
Reservation prices and the buyer's and seller's cost-benefit rule
- 03
Market demand and supply as horizontal sums
- 04
Equilibrium, excess supply and excess demand
- 05
Shift factors: substitutes, complements, income, input prices, joint products
- 06
Movements along a curve versus shifts of the curve
- 07
Simultaneous shifts and ambiguous outcomes
Worked example · free
Summing two buyers and solving for equilibrium
- +1Rewrite each curve in quantity form: a buyer demands q = 12 − 0.5P and a seller supplies q = 0.5P − 2.
- +1Add horizontally: market demand Q = 2(12 − 0.5P) = 24 − P; market supply Q = 4(0.5P − 2) = 2P − 8.
- +1Set them equal: 24 − P = 2P − 8, so 3P = 32 and P = $10.67 to the nearest cent.
- +1Quantity is 24 − 10.67 = 13.33 units, and supply gives the same: 2(10.67) − 8 = 13.33.
Key terms
- Price taker
- A buyer or seller too small to influence the market price through its own decisions.
- Reservation price
- The highest price a buyer would pay, or the lowest a seller would accept, for a unit.
- Horizontal summation
- Building a market curve by adding the quantities of every individual buyer or seller at each price.
- Excess demand
- A situation below the equilibrium price where quantity demanded exceeds quantity supplied, pushing the price up.
- Inferior good
- A good whose demand falls when incomes rise, as buyers switch to better alternatives.
- Complements in production
- Goods produced together, such as beef and leather, so more of one lowers the cost of the other.
- Market equilibrium
- The price at which quantity demanded equals quantity supplied, with no pressure for the price to change.
Demand, Supply and Market Equilibrium FAQ
What is the difference between a change in demand and a change in quantity demanded?
A change in the good’s own price moves you along the demand curve and changes quantity demanded. Anything else that changes how much buyers want at every price, such as income or a rival’s price, shifts the whole curve and changes demand.
Why do we add demand curves horizontally rather than vertically?
Because at any given price the market quantity is the sum of what each buyer wants at that price. Adding vertically would add prices, which has no meaning for the market.
What should I write when two shifts push quantity in opposite directions?
State that the change in quantity is ambiguous and name the condition that decides it, for example that quantity rises if the demand shift is larger than the supply shift. Then state the variable that moves with certainty.
How do I know whether an event affects demand or supply?
Ask who the event touches first. Changes in buyers’ incomes, tastes or the prices of related goods they buy shift demand. Changes in input prices, technology, weather or the output of joint products shift supply.
What happens when the price is above equilibrium?
Quantity supplied exceeds quantity demanded, so there is excess supply. Sellers holding unsold stock cut prices to attract buyers, and the price falls until the surplus disappears at the equilibrium. Below equilibrium the reverse happens: excess demand bids the price up.
Assessment move
Build speed on two skills. For algebra, practise converting curves to quantity form, summing them and solving, then check the answer in both equations. For shifts, keep a list of the shift factors with an example of each and practise the four moves on unfamiliar markets until you can draw and label the graph in under a minute.
Week 3 questions pair events deliberately, so rehearse simultaneous shifts and the wording for an ambiguous result.
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