Class 34 - Confucius Says: Be at Equilibrium

Today we looked at what happens when there are changes in supply and demand. We ask ourselves two questions: How the buyers and sellers respond to the changes and whose plans are satisfied?

These changes create either:

Surplus – quantity supplied > quantity demanded at a particular price

Shortage – quantity demanded > quantity supplied at a particular price

When these two conditions happen, forces work to reestablish equilibrium.

The high prices signify scarce goods. Prices increase to relieve a shortage.

The low prices signify non-scarce goods. Price decrease to relieve a surplus.

Scarcity talks about relative abundance – not absolute abundance.

Equilibrium is where neither buyers nor sellers have the incentive to change their behavior at a certain price.

There is market clearing equilibrium (good) where quantity demanded = quantity supplied.

Also there is non-market clearing (not good).