ME IBS Demand, Supply & Equilibrium July 2011

7/29/2019 ME IBS Demand, Supply & Equilibrium July 2011

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Supplyand Demand

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The Law of DemandThe law of demand holds that other

things equal, as the price of a good or

service rises, its quantity demandedfalls.

The reverse is also true: as the price

of a good or service falls, its quantitydemanded increases.

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Demand Curve

The demand curve has a negative slope,consistent with the law of demand.

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The Law of SupplyThe law of supplyholds that other

things equal, as the price of a good

rises, its quantity supplied will rise,and vice versa.

Why do producers produce moreoutput when prices rise? They seek higher profits

They can cover higher marginal costs ofproduction

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Supply Curve

The supply curve has a positive slope,consistent with the law of supply.

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Equilibrium

In economics, an equilibriumis asituation in which:

there is no inherent tendency tochange,

quantity demanded equals quantitysupplied, and

the market just clears.

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Equilibrium

Equilibrium occurs at a price of $3 and aquantity of 30 units.

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Shortages and Surpluses A shortageoccurs when quantity

demanded exceeds quantity supplied.

A shortage implies the market price istoo low.

A surplusoccurs when quantity suppliedexceeds quantity demanded.

A surplus implies the market price is toohigh.

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Shift in the Demand Curve

A change in any variable other thanprice that influences quantitydemanded produces a shift in thedemand curveor a change in demand

Factors that shift the demand curveinclude:Change in consumers income

Consumer preferencesPrices of related goods:

Substitutes: goods consumed in place ofone another

Complements: goods consumed jointly 9


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Shift in the Demand Curve

This demand curve has shifted to the right. Quantitydemanded is now higher at any given price.

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Equilibrium After a Demand Shift

The shift in the demand curve moves themarket equilibrium from point A to point B,resulting in a higher price and higher quantity.

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Shift in the Supply Curve

A change in any variable other than pricethat influences quantity supplied produces

a shift in the supply curveor a change insupply.

Factors that shift the supply curve include:

Change in input costs

Increase in technology

Change in size of the industry

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Shift in the Supply Curve

For an given rental price, quantity supplied isnow lower than before.

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Equilibrium After a Supply Shift

The shift in the supply curve moves the marketequilibrium from point A to point B, resulting in a higherprice and lower quantity.

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Price Ceilings & Floors

Aprice ceilingis a legal maximum that canbe charged for a good.

Results in a shortage of a product

Common examples include apartmentrentals and credit cards interest rates.

Aprice flooris a legal minimum that can becharged for a good.

Results in a surplus of a productCommon examples include soybeans,

milk, minimum wage

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Price Ceiling

A price ceiling is set at $2 resulting ina shortage of 20 units.

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Price Floor

A price floor is set at $4 resulting in asurplus of 20 units.

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Documents

ME IBS Demand, Supply & Equilibrium July 2011