Page 38 - Microeconomics, Fourth Edition

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12 CHAPTER 1 ANALYZING ECONOMIC PROBLEMS

A
FIGURE 1.1 Equilibrium with a Ball
and Cup
This physical system is in equilibrium when
the ball is resting at point B at the bottom of
the cup. The ball could remain there indefi- B
nitely. The system will not be in equilibrium Force of gravity
when the ball is at point A because the force
of gravity would pull the ball toward B.

EQUILIBRIUM ANALYSIS

A second important tool in microeconomics is the analysis of equilibrium, a concept
equilibrium A state or found in many branches of science. An equilibrium in a system is a state or condition
condition that will continue that will continue indefinitely as long as exogenous factors remain unchanged—that
indefinitely as long as is, as long as no outside factor upsets the equilibrium. To illustrate an equilibrium,
factors exogenous to the imagine a physical system consisting of a ball in a cup, as is depicted in Figure 1.1.
system remain unchanged.
Here the force of gravity pulls the ball downward toward the bottom of the cup. A ball
initially held at point A will not remain at point A when the ball is released. Rather, it
will rock back and forth until it settles at point B. Thus, the system is not in equilib-
rium when the ball is released at A because the ball will not remain there. It would be
in equilibrium if the ball were released at B. The system will remain in equilibrium
when the ball is at B until some exogenous factor changes; for example, if someone
were to tip the cup, the ball would move from B to another point.
You may have encountered the notion of an equilibrium in competitive markets
earlier in an introductory course in economics. In Chapter 2 we will provide a more de-
tailed treatment of markets, supply, and demand. But for now let’s briefly review how
the analysis of supply and demand can illustrate the concept of equilibrium in a market.
Consider the worldwide market for coffee beans. Suppose the demand and supply
curves for coffee beans are as depicted in Figure 1.2. The demand curve tells us what
quantity of coffee beans (Q) would be purchased in that market at any given price. Think
of a demand curve as representing the answer to a set of “what if” questions. For exam-
ple, what quantity of coffee beans would be demanded if the price were $2.50 per pound?
The demand curve in Figure 1.2 tells us that Q 2 pounds would be purchased if the price
of coffee beans were $2.50 per pound. The demand curve also shows us that Q 4 pounds
would be purchased if the price were $1.50 per pound. The negative or downward slope
of the demand curve shows that higher prices tend to reduce the consumption of coffee.
The supply curve shows what quantity of coffee beans would be offered for sale in the
market at any given price. You can also view a supply curve as representing the answer to
a set of “what if” questions. For example, what quantity of coffee beans would be offered
for sale if the price were $1.50 per pound? The supply curve in Figure 1.2 shows us that
Q 1 pounds would be offered for sale at that price. The supply curve also indicates that if
the price were $2.50 per pound, Q 5 pounds would be offered for sale. The positive (or up-
ward) slope of the supply curve suggests that higher prices tend to stimulate production.
How is the concept of equilibrium related to this discussion of supply and
demand? In a competitive market, equilibrium is achieved at a price at which the
market clears—that is, at a price at which the quantity offered for sale just equals the
quantity demanded by consumers. The coffee bean market depicted in Figure 1.2 will