Unit 1 Micro: Exercise on Equilibrium Market Prices

I have produced a classroom exercise on changing conditions of supply and demand and how they might affect equilibrium prices. This is available to download as a pdf file using the link below.

The twin forces of supply and demand play a key role is establishing prices in markets for different goods and services.

When supply and demand are in balance a market is said to have reached an equilibrium resulting in a state of balance or rest. In microeconomics, equilibrium is reached at a price when quantity supplied balances with demand, there is no surplus or shortage that might drive prices lower or higher.

The equilibrium is also called the “market-clearing price”

When a market is in a stable equilibrium, it requires an external event to cause this to change. Changes in either the level of market demand and/or market supply will bring about a new equilibrium price and quantity traded. For example,

A rise in demand, for a given level of market supply will cause prices to increase and the quantity traded to expand

A rise in supply, for a given level of market demand will cause prices to decrease and the quantity traded to expand

In the exercise below there is a change in either a condition of demand or supply. In each case decide first whether demand or supply has changed, in which direction (an increase or a decrease) and the probable impact on the market equilibrium price. How many of the changes can you identify correctly?

In each case assume ceteris paribus, i.e. all other factors that might affect supply and demand in the market remain unchanged. This simplifying assumption allows is to isolate the impact of a single change.

Resource download
AS_Micro_Market_Prices_Exercise.pdf