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 plot the demand curve (Qd = f(P)) and the supply curve (Qs = g(P)) on the same graph with price (P) on the vertical axis and quantity (Q) on the horizontal axis. Locate the intersection point of the two curves, which represents the market equilibrium. The corresponding price (Pe) and quantity (Qe) at this intersection point indicate the equilibrium price and quantity where the market clears, and there is no surplus or shortage of goods.

Step by step solution

Plot the demand curve

First, we need to plot the demand curve on a graph with the price (P) on the vertical axis and the quantity demanded (Q) on the horizontal axis. The demand curve can be represented as a function of price, such as Qd = f(P), in which the quantity demanded (Qd) is dependent on the price (P). The demand curve typically slopes downward (from left to right), which represents the inverse relationship between price and quantity demanded: as price increases, quantity demanded decreases, and vice versa.

Plot the supply curve

Next, we need to plot the supply curve on the same graph. The supply curve can be represented as a function of price, such as Qs = g(P), in which the quantity supplied (Qs) is dependent on the price (P). The supply curve typically slopes upward (from left to right), which represents the direct relationship between price and quantity supplied: as price increases, quantity supplied increases, and vice versa.

Identify the intersection point

Locate the point where the demand curve (Qd = f(P)) and the supply curve (Qs = g(P)) intersect. This intersection point represents equilibrium in the market, as the quantity demanded is equal to the quantity supplied.

Determine the equilibrium price and quantity

At the intersection point, read the corresponding price (Pe) on the vertical axis and the quantity (Qe) on the horizontal axis. This equilibrium price (Pe) and quantity (Qe) are the values at which the market clears, meaning there is no surplus or shortage of goods. In summary, to locate the equilibrium point in a demand and supply graph, plot both the demand and supply functions on the same graph, identify the intersection point, and read the equilibrium price and quantity at that point. The equilibrium point represents the optimal balance between supply and demand in a market.

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