Equilibrium Price

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Equilibrium Price

Category: Critical Thinking

Subcategory: Economics

Level: High School

Pages: 1

Words: 275

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Equilibrium Price
When the weather turns colder, demand for hot chocolate increases due to changes in buyers’ preferences. The demand curve shifts to the right, causing a shortage (Q1-Q0). As a result, price rises to PE, causing the quantity supplied to increase to QE. PE and QE become the new equilibrium price and quantity respectively.
QE
Q0
PE
P0
S
QUANTITY
PRICE

FIGURE 1

D1

D0

Q1

A fall in the price of tea, a substitute for hot chocolate, reduces the demand for hot chocolate because consumers will opt for the cheaper substitute. As a result, the demand curve will shift to the left, creating excess supply. Price for hot chocolate will decrease to PE, reducing the quantity supplied to QE. PE and QE become the new equilibrium price and quantity respectively.
FIGURE 2
PE
S
D1
D0
P0
PRICE
QUANTITY

QO
QE

A decrease in the price of cocoa beans reduces the cost of manufacture of chocolate. The supply curve will shift to the right, increasing supply and causing excess supply. This excess supply pushes price down to PE and supply consequently reduces to QE to form a new equilibrium.

FIGURE 3
S1
SO
D
QO
QE
PE
P0
PRICE
QUANTITY

A decrease in the price of whipped cream will also reduce the production cost of chocolate. The supply curve will shift to the right, increasing supply and causing excess supply. This excess supply pushes price down to PE and supply consequently reduces to QE to form a new equilibrium (See Figure 3).
Introduction of a better method of harvesting cocoa beans will lead to an increase in the raw materials for producing chocolate, thus shifting the supply curve to the right and increasing the supply of chocolate. This excess supply pushes price down to PE and supply consequently reduces to QE to form a new equilibrium (See Figure 3).
An announcement that hot chocolate cures acne will increase the demand for chocolate due to changes in consumers’ preferences. The demand curve shifts to the right, causing a shortage (Q1-Q0). As a result, price rises to PE, causing the quantity supplied to increase to QE. PE and QE become the new equilibrium price and quantity respectively (See Figure 1).
An increase in the price of milk increases the cost of production of hot chocolate. In return, the supply curve will shift to the left, reducing supply and creating a shortage. Consequently, the price of hot chocolate will increase and reduce the quantity supplied, creating a new equilibrium, with PE and QE being the new equilibrium price and quantity respectively.
FIGURE 4
S1
PRICE

S0
PE

P0

D

QE
Q0
QUANTITY

A fall in consumers’ income reduces their purchasing power and decreases demand. As a result, the demand curve will shift to the left, creating excess supply. Price for hot chocolate will decrease to PE, reducing the quantity supplied to QE. PE and QE become the new equilibrium price and quantity respectively (See Figure 2).
Producer’s expectation that the price of hot chocolate will increase may cause the supply curve to shift to the left, thus reducing supply. Producers may reduce their present production in anticipation of the higher future prices. The shortage will increase the price of hot chocolate and create new equilibrium price and quantity, PE and QE, respectively (See Figure 4).

QUANTITY
PRICE
S
D
PE
QE
QD
QS
PO
A price higher than the equilibrium price creates excess supply. The quantity supplied, QS, will be higher than the quantity demanded, QD. Consequently, price will decrease as a result of the excess supply, restoring demand and supply back to equilibrium.