Chapter 3: Problem 17

How can you locate the equilibrium point on a demand and supply graph?

Short Answer

Expert verified

To locate the equilibrium point on a demand and supply graph, first understand the demand and supply curves, with the demand curve having a negative slope and the supply curve having a positive slope. Plot both curves on a graph, with the x-axis representing the quantity and the y-axis representing the price. Identify the point where the two curves intersect, as this point represents the equilibrium point where the quantity demanded equals the quantity supplied. Determine the coordinates of this point by noting the values of the x-axis (quantity) and the y-axis (price) at the point of intersection. The equilibrium point signifies the balanced market situation with no excess demand or excess supply.

Step by step solution

1. Understand the demand and supply curves.

Demand and supply curves show the relationship between the price of a good and the quantity demanded or supplied by consumers and producers, respectively. The demand curve generally has a negative slope, meaning that as the price increases, the quantity demanded decreases, and vice versa. The supply curve, on the other hand, typically has a positive slope, meaning that as the price increases, the quantity supplied also increases.

2. Plot the demand and supply curves on a graph.

Create a graph with the x-axis representing the quantity and the y-axis representing the price of the good. Then, plot both the demand curve and the supply curve on the same graph. Make sure to label both curves accordingly; the demand curve should be labeled as 'D' and the supply curve as 'S.'

3. Identify the point of intersection of the two curves.

Observe where the two curves intersect, that is, where they cross each other on the graph. This point is known as the equilibrium point, as it represents the point at which the quantity demanded equals the quantity supplied.

4. Determine the coordinates of the equilibrium point.

To find the coordinates of the equilibrium point, note the values of the x-axis (quantity) and the y-axis (price) at the point of intersection. These coordinates represent the equilibrium quantity and equilibrium price, respectively. It might be helpful to draw a vertical line from the equilibrium point to the x-axis and a horizontal line to the y-axis to locate these values more easily.

5. Interpret the equilibrium point on the graph.

The equilibrium point represents the quantity of the good that consumers are willing to buy and producers are willing to sell at a specific price level. In other words, it is the point at which the market for the good is balanced, with no excess demand or excess supply. The equilibrium point is essential for understanding how prices adjust in response to changes in supply and demand in the market, and thus, it is critical in microeconomics.