ECON201 Lecture Notes - Lecture 3: Economic Equilibrium, Demand Curve, Tax Incidence
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Pe is the equilibrium price since it is the price where every buyer can find a seller (or, at pe the quantity supplied and the quantity demanded in the market are equal). At p1, the quantity demanded is less than the quantity supplied. Only the amount demanded will be sold and, as a result, a surplus is created. At p2, the quantity demanded is more than the amount that producers are willing to supply at that price and, as a result, a shortage arises. Any shifts in the supply or demand curves (or both) create incentives for the market equilibrium to adjust. For example, when demand shifts to the right, price and quantity demanded transition along the supply curve from the original equilibrium at point a to a new equilibrium at point b. This results in a higher equilibrium price and quantity than before. Markets take time to respond to price changes or to shifts in demand or supply curves.