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…

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