The Interaction of Demand and Supply When buyers and sellers interact, the market moves toward...

The Interaction of Demand and Supply

When buyers and sellers interact, the market moves toward market equilibrium: when the quantity demanded and the quantity supplied at a particular price are equal

The Interaction of Demand and Supply (continued)

Equilibrium price: the price at which the quantity demanded and the quantity supplied are equal

Market Demand and Supply Schedule

Price per salad ($)

Quantity Demanded

Quantity Supplied

$10 10 40$8 15 35$6 25 25$4 35 15$2 40 10

Market Demand and Supply Schedule (continued)

How does the market demand and supply schedule illustrate the laws of demand and supply?It shows that consumers are willing

to buy more goods at lower prices while producers are willing to offer more goods for sale at higher prices.

Graph the Market Demand and Supply Schedule

Label the demand curve as D1 and the supply curve as S1. Label the equilibrium point.

Reaching the Equilibrium PriceMarkets do not always function at

equilibrium right awaySurplus: the result of quantity

supplied being greater than quantity demanded

Reaching the Equilibrium Price (continued)

Shortage: the result of quantity demanded being greater than quantity supplied

Surplus, Shortage, and Equilibrium

Identify equilibrium, surplus, and shortage on a graph

Change in Demand and Equilibrium Price

Review: the 6 factors that cause a change in demand

IncomeConsumer tasteConsumer

expectationsMarket sizeSubstitutesComplements

Shifts in the Demand CurveWhen a change in

consumer taste causes a decrease in demand the curve shifts to the left and there will be a new equilibrium price

The graph looks like this:

Shifts in the Demand Curve (continued)

If a change in demand were to cause an increase in demand, the demand curve would shift to the right and there will be a new equilibrium price

The graph looks like this:

Change in Supply and Equilibrium Price

Review: the 6 factors that cause a change in supplyInput costsProductivityTechnologyGovernment actionProducers expectationsNumber of producers

Shifts in the Supply CurveWhen there is a

decrease in supply, the supply curve shifts to the left and equilibrium price rises

The graph looks like this:

Shifts in the Supply Curve (continued)

When there is an increase in supply, the supply curve shifts to the right and equilibrium price decreases

The graph looks like this:

In Summary…

Then…OR

Then…OR

Questions1. Why is the market always moving toward

equilibrium?

2. Between 2003 and 2005 there was a huge growth in the market for premium blue jeans priced at $200 or more. Then in the summer of 2005 major department stores cut the price on jeans and these jeans were also sold online. Use the economic concepts from this section to describe what happened in this market.

3. There are 3 pizza parlors in your neighborhood and one of them closes. What will happen to the supply of pizza? How will that affect the equilibrium price of pizza?