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Supply, Demand, and Market Supply, Demand, and Market EquilibriumEquilibrium
Market Equilibrium:Market Equilibrium:
• A competitive market is in equilibrium A competitive market is in equilibrium when price has moved to a level at when price has moved to a level at which the quantity of a good or service which the quantity of a good or service demanded equals the quantity of that demanded equals the quantity of that good or service supplied.good or service supplied.
What determines the What determines the price at which a good or price at which a good or
service is bought and service is bought and sold?sold?
What determines What determines the quantity the quantity
transacted of the transacted of the good or service?good or service?
Market Equilibrium:
• The price that matches the quantity The price that matches the quantity supplied and the quantity supplied and the quantity demanded is the equilibrium pricedemanded is the equilibrium price• The quantity bought and sold at The quantity bought and sold at
that price is the equilibrium that price is the equilibrium quantity.quantity.
Equilibrium Price:Equilibrium Price:
• This is also known as the market-This is also known as the market-clearing price – it is the price that clearing price – it is the price that “clears the market” by ensuring that “clears the market” by ensuring that every buyer willing to pay that price every buyer willing to pay that price finds a seller willing to sell at that pricefinds a seller willing to sell at that price
• How do we find the equilibrium price?How do we find the equilibrium price?
Finding Equilibrium Price and QuantityFinding Equilibrium Price and Quantity
• Easiest way, putting the supply curve and Easiest way, putting the supply curve and demand curve on the same diagramdemand curve on the same diagram
• Supply curve shows the quantity supplied at Supply curve shows the quantity supplied at any given priceany given price
• Demand curve shows the quantity demanded Demand curve shows the quantity demanded at any given priceat any given price
• The price where both meet is the equilibrium The price where both meet is the equilibrium price – where quantity supplied equals price – where quantity supplied equals quantity demandedquantity demanded
Finding Equilibrium Price and QuantityFinding Equilibrium Price and Quantity
Demand Curve forDemand Curve for Coffee BeansCoffee Beans
Supply Curve forSupply Curve for Coffee BeansCoffee Beans
Market equilibrium Market equilibrium occurs at point E, where occurs at point E, where the supply curve and the supply curve and the demand curve the demand curve intersect. intersect.
Price of coffee beans (per
pound)
Quantity of coffee beans (billions of pounds)
70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
E EquilibriumEquilibrium price
Equilibrium quantity
Market EquilibriumMarket Equilibrium
Questions on Equilibrium Price:Questions on Equilibrium Price:
1.1. Why do all sales and purchases in a Why do all sales and purchases in a market take place at the same price?market take place at the same price?
2.2. Why does the market price fall if it is Why does the market price fall if it is above the equilibrium price?above the equilibrium price?
3.3. Why does the market price rise if it is Why does the market price rise if it is below the equilibrium price?below the equilibrium price?
1. Why do all sales and purchases in a market 1. Why do all sales and purchases in a market take place at the same price?take place at the same price?
• In any market where the buyers and In any market where the buyers and sellers have both been around for sellers have both been around for awhile, sales and purchases tend to awhile, sales and purchases tend to converge at a generally uniform price – converge at a generally uniform price – the market pricethe market price
2. Why does the market price fall if it is above 2. Why does the market price fall if it is above the equilibrium price?the equilibrium price?
• Point E is the Point E is the market market equilibriumequilibrium
• What is the new What is the new supply?supply?
• What is the new What is the new demand?demand?
This is called a surplus!This is called a surplus!A surplus is when a good or service quantity supplied A surplus is when a good or service quantity supplied
exceeds the quantity demanded. This occurs when the exceeds the quantity demanded. This occurs when the price is above its equilibrium level.price is above its equilibrium level.
3. Why does the market price rise if it is below 3. Why does the market price rise if it is below the equilibrium price?the equilibrium price?
• Point E is the Point E is the market equilibriummarket equilibrium
• What is the new What is the new quantity quantity demanded?demanded?
• What is the new What is the new quantity supplied?quantity supplied?
This is called a shortage.This is called a shortage.A shortage occurs when a good or service quantity A shortage occurs when a good or service quantity
demanded exceeds the quantity supplied. Shortages demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.occur when the price is below its equilibrium level.
Questions:Questions:
• In the following three situations, the In the following three situations, the market is initially in equilibrium. After market is initially in equilibrium. After each event described below, does a each event described below, does a surplus or a shortage exist at the surplus or a shortage exist at the original equilibrium price? What will original equilibrium price? What will happen to the equilibrium price as a happen to the equilibrium price as a result?result?
a. Shortagea. Shortage c. what happens toc. what happens tob. Surplusb. Surplus equilibrium price?equilibrium price?
1.1. 2005 was a very good year for California wine-2005 was a very good year for California wine-grape growers, who produced a bumper crop.grape growers, who produced a bumper crop.
2.2. After Hurricane Liz, Florida hoteliers often find After Hurricane Liz, Florida hoteliers often find that many people cancel their upcoming that many people cancel their upcoming vacations, leaving them with empty hotel vacations, leaving them with empty hotel rooms.rooms.
3.3. After a heavy snowfall, many people want to After a heavy snowfall, many people want to buy secondhand snow blowers at the local buy secondhand snow blowers at the local tool shop.tool shop.
Changes in Supply and Demand CurvesChanges in Supply and Demand Curves
• What happens when the supply curve What happens when the supply curve changes but the demand curve does changes but the demand curve does not? What about the other way not? What about the other way around?around?
• When one curve shifts, it alters the When one curve shifts, it alters the equilibrium price and quantity.equilibrium price and quantity.
Demand Curve ShiftsDemand Curve Shifts
• Coffee and Tea are substitutes.Coffee and Tea are substitutes.• If the price of tea rises, the demand for If the price of tea rises, the demand for
coffee will increasecoffee will increase• If the price of tea falls, the demand for coffee If the price of tea falls, the demand for coffee
will decreasewill decrease
• How does the price of tea affect the market How does the price of tea affect the market equilibrium for coffee?equilibrium for coffee?
Equilibrium and Shifts of the Demand CurveEquilibrium and Shifts of the Demand Curve
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SupplySupply
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Price of Price of coffee beanscoffee beans
Quantity of coffee beansQuantity of coffee beans
Price Price risesrises
Quantity risesQuantity rises
An increase in An increase in demand…demand…
… … leads to a leads to a movement along the movement along the supply curve due to a supply curve due to a higher equilibrium higher equilibrium price and higher price and higher equilibrium quantityequilibrium quantity
Demand Curve ShiftsDemand Curve Shifts
• Basic principle to remember:Basic principle to remember:
When demand for a good or service increases, When demand for a good or service increases, the equilibrium price and the equilibrium the equilibrium price and the equilibrium quantity of the good or service both risequantity of the good or service both rise
Demand Curve ShiftsDemand Curve Shifts
• What about the reverse, fall in the price of What about the reverse, fall in the price of tea?tea?
Reduces demand for coffee and shifts the demand Reduces demand for coffee and shifts the demand curve to the leftcurve to the left
Based on the original price, a surplus occurs as Based on the original price, a surplus occurs as quantity supplied exceeds quantity demandedquantity supplied exceeds quantity demanded
The price falls and leads to a decrease in the quantity The price falls and leads to a decrease in the quantity suppliedsupplied
Results are a lower equilibrium price and a lower Results are a lower equilibrium price and a lower equilibrium quantityequilibrium quantity
Demand Curve ShiftsDemand Curve Shifts
• Basic principle to remember (previous slide):Basic principle to remember (previous slide):– When demand for a good or service increases, When demand for a good or service increases,
the equilibrium price and the equilibrium the equilibrium price and the equilibrium quantity of the good or service both risequantity of the good or service both rise
• Second basic principle to remember:Second basic principle to remember:– When demand for a good or service decreases, When demand for a good or service decreases,
the equilibrium price and the equilibrium the equilibrium price and the equilibrium quantity of the good or service both fallquantity of the good or service both fall
Supply Curve ShiftsSupply Curve Shifts
• A drought in Vietnam sharply reduced A drought in Vietnam sharply reduced its supply of coffee beans.its supply of coffee beans.
• How has this affected the market How has this affected the market equilibrium?equilibrium?
Equilibrium and Shifts of the Supply CurveEquilibrium and Shifts of the Supply Curve
PP22
PP11
QQ11
QQ22
DemandDemand
EE11
SS11
SS22
EE22
Price of Price of coffee coffee beansbeans
Quantity of coffee Quantity of coffee beansbeans
Price Price risesrises
Quantity Quantity fallsfalls
A A decrease decrease
in in supply…supply…
… … leads to a movement leads to a movement along the demand along the demand curve due to a higher curve due to a higher equilibrium price and equilibrium price and lower equilibrium lower equilibrium quantityquantity
Supply Curve ShiftsSupply Curve Shifts
• General Principle to Remember:General Principle to Remember:–When supply of a good or service When supply of a good or service
decreases, the equilibriu8m price of the decreases, the equilibriu8m price of the good or service rises and the equilibrium good or service rises and the equilibrium quantity of the good or service falls.quantity of the good or service falls.
Supply Curve ShiftsSupply Curve Shifts
• What happens to the market when the What happens to the market when the supply increases?supply increases?
Increase in supply leads to a rightward Increase in supply leads to a rightward shift of the supply curveshift of the supply curve
At the original price, a surplus existsAt the original price, a surplus existsDue to the surplus, the equilibrium price Due to the surplus, the equilibrium price
falls and the quantity demanded risesfalls and the quantity demanded rises
Supply Curve ShiftsSupply Curve Shifts
• General Principle to Remember:General Principle to Remember:– When supply of a good or service decreases, the When supply of a good or service decreases, the
equilibriu8m price of the good or service rises equilibriu8m price of the good or service rises and the equilibrium quantity of the good or and the equilibrium quantity of the good or service falls.service falls.
• Second Principle to Remember:Second Principle to Remember:– When supply of a good or service increases, the When supply of a good or service increases, the
equilibrium price of the good or service falls and equilibrium price of the good or service falls and the equilibrium quantity of the good or service the equilibrium quantity of the good or service rises.rises.
Supply and Demand BOTH shiftingSupply and Demand BOTH shifting
• An event happens and it can shift both An event happens and it can shift both the demand and supply curves at the the demand and supply curves at the same timesame time
Simultaneous Shifts of Supply and DemandSimultaneous Shifts of Supply and Demand
Two opposing forces Two opposing forces determining the determining the equilibrium quantity.equilibrium quantity.
The increase in demand The increase in demand dominates the decrease dominates the decrease in supply.in supply.
Quantity of coffeeQuantity of coffeeQQ22QQ
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One possible outcome: Price Rises, Quantity One possible outcome: Price Rises, Quantity RisesRises
Price of coffeePrice of coffeeSmall decrease Small decrease
in supplyin supply
Large increase Large increase in demandin demand
Simultaneous Shifts of Supply and DemandSimultaneous Shifts of Supply and Demand
Two opposing forces Two opposing forces determining the determining the equilibrium quantity.equilibrium quantity.
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QQ22
PP22
PP11
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DD22
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Another Possibility Outcome: Price Rises, Another Possibility Outcome: Price Rises, Quantity FallsQuantity FallsPrice of coffeePrice of coffee
Quantity of coffeeQuantity of coffee
Large Large decrease decrease in supplyin supply
Small increase Small increase in demandin demand
Supply, Demand, and Market Supply, Demand, and Market Equilibrium NotesEquilibrium Notes
Market Equilibrium:Market Equilibrium:
• A competitive market is in equilibrium A competitive market is in equilibrium when price has moved to a level at when price has moved to a level at which the quantity of a good or service which the quantity of a good or service demanded equals the quantity of that demanded equals the quantity of that good or service supplied.good or service supplied.
What determines the What determines the price at which a good or price at which a good or
service is bought and service is bought and sold?sold?
What determines What determines the quantity the quantity
transacted of the transacted of the good or service?good or service?
Market Equilibrium:
• The price that matches the quantity The price that matches the quantity supplied and the quantity supplied and the quantity demanded is the equilibrium pricedemanded is the equilibrium price• The quantity bought and sold at The quantity bought and sold at
that price is the equilibrium that price is the equilibrium quantity.quantity.
Equilibrium Price:Equilibrium Price:
• This is also known as the market-This is also known as the market-clearing price – clearing price –
• How do we find the equilibrium price?How do we find the equilibrium price?
Finding Equilibrium Price and QuantityFinding Equilibrium Price and Quantity
• Easiest way, putting the supply curve and Easiest way, putting the supply curve and demand curve on the same diagramdemand curve on the same diagram
• Supply curve Supply curve
• Demand curve Demand curve
• The price where both meet is the equilibrium The price where both meet is the equilibrium price – price –
Finding Equilibrium Price and QuantityFinding Equilibrium Price and Quantity
Demand Curve forDemand Curve for Coffee BeansCoffee Beans
Supply Curve forSupply Curve for Coffee BeansCoffee Beans
Price of coffee beans (per
pound)
Quantity of coffee beans (billions of pounds)
70 10 1513 17
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
Supply
Demand
E
Market EquilibriumMarket Equilibrium
Questions on Equilibrium Price:Questions on Equilibrium Price:
1.1. Why do all sales and purchases in a Why do all sales and purchases in a market take place at the same price?market take place at the same price?
2.2. Why does the market price fall if it is Why does the market price fall if it is above the equilibrium price?above the equilibrium price?
3.3. Why does the market price rise if it is Why does the market price rise if it is below the equilibrium price?below the equilibrium price?
1. Why do all sales and purchases in a market 1. Why do all sales and purchases in a market take place at the same price?take place at the same price?
• In any market where the buyers and In any market where the buyers and sellers have both been around for sellers have both been around for awhile, sales and purchases tend to awhile, sales and purchases tend to converge at a generally uniform price – converge at a generally uniform price – the market pricethe market price
2. Why does the market price fall if it is above 2. Why does the market price fall if it is above the equilibrium price?the equilibrium price?
• Point E is the Point E is the market market equilibriumequilibrium
• What is the new What is the new supply?supply?
• What is the new What is the new demand?demand?
This is called a surplus!This is called a surplus!
3. Why does the market price rise if it is below 3. Why does the market price rise if it is below the equilibrium price?the equilibrium price?
• Point E is the Point E is the market equilibriummarket equilibrium
• What is the new What is the new quantity quantity demanded?demanded?
• What is the new What is the new quantity supplied?quantity supplied?
This is called a shortage.This is called a shortage.
Questions:Questions:
• In the following three situations, the In the following three situations, the market is initially in equilibrium. After market is initially in equilibrium. After each event described below, does a each event described below, does a surplus or a shortage exist at the surplus or a shortage exist at the original equilibrium price? What will original equilibrium price? What will happen to the equilibrium price as a happen to the equilibrium price as a result?result?
a. Shortagea. Shortage c. what happens toc. what happens tob. Surplusb. Surplus equilibrium price?equilibrium price?
1.1. 2005 was a very good year for California wine-2005 was a very good year for California wine-grape growers, who produced a bumper crop.grape growers, who produced a bumper crop.
2.2. After Hurricane Liz, Florida hoteliers often find After Hurricane Liz, Florida hoteliers often find that many people cancel their upcoming that many people cancel their upcoming vacations, leaving them with empty hotel vacations, leaving them with empty hotel rooms.rooms.
3.3. After a heavy snowfall, many people want to After a heavy snowfall, many people want to buy secondhand snow blowers at the local buy secondhand snow blowers at the local tool shop.tool shop.
Changes in Supply and Demand CurvesChanges in Supply and Demand Curves
• What happens when the supply curve What happens when the supply curve changes but the demand curve does changes but the demand curve does not? What are the other way around?not? What are the other way around?
Demand Curve ShiftsDemand Curve Shifts
• Coffee and Tea are substitutes.Coffee and Tea are substitutes.
• How does the price of tea affect the market How does the price of tea affect the market equilibrium for coffee?equilibrium for coffee?
Equilibrium and Shifts of the Demand CurveEquilibrium and Shifts of the Demand Curve
QQ22QQ
11
PP22
PP11
DD22
SupplySupply
DD11
EE22
EE11
Price of Price of coffee beanscoffee beans
Quantity of coffee beansQuantity of coffee beans
Demand Curve ShiftsDemand Curve Shifts
• Basic principle to remember:Basic principle to remember:
Demand Curve ShiftsDemand Curve Shifts
• What about the reverse, fall in the price of What about the reverse, fall in the price of tea?tea?
Demand Curve ShiftsDemand Curve Shifts
• Basic principle to remember (previous slide):Basic principle to remember (previous slide):– When demand for a good or service increases, When demand for a good or service increases,
the equilibrium price and the equilibrium the equilibrium price and the equilibrium quantity of the good or service both risequantity of the good or service both rise
• Second basic principle to remember:Second basic principle to remember:– When demand for a good or service decreases, When demand for a good or service decreases,
the equilibrium price and the equilibrium the equilibrium price and the equilibrium quantity of the good or service both fallquantity of the good or service both fall
Supply Curve ShiftsSupply Curve Shifts
• A drought in Vietnam sharply reduced A drought in Vietnam sharply reduced its supply of coffee beans.its supply of coffee beans.
• How has this affected the market How has this affected the market equilibrium?equilibrium?
Equilibrium and Shifts of the Supply CurveEquilibrium and Shifts of the Supply Curve
PP22
PP11
QQ11
QQ22
DemandDemand
EE11
SS11
SS22
EE22
Price of Price of coffee coffee beansbeans
Quantity of coffee Quantity of coffee beansbeans
Supply Curve ShiftsSupply Curve Shifts
• General Principle to Remember:General Principle to Remember:–When supply of a good or service When supply of a good or service
decreases, the equilibriu8m price of the decreases, the equilibriu8m price of the good or service rises and the equilibrium good or service rises and the equilibrium quantity of the good or service falls.quantity of the good or service falls.
Supply Curve ShiftsSupply Curve Shifts
• What happens to the market when the What happens to the market when the supply increases?supply increases?
Supply Curve ShiftsSupply Curve Shifts
• General Principle to Remember:General Principle to Remember:– When supply of a good or service decreases, the When supply of a good or service decreases, the
equilibriu8m price of the good or service rises equilibriu8m price of the good or service rises and the equilibrium quantity of the good or and the equilibrium quantity of the good or service falls.service falls.
• Second Principle to Remember:Second Principle to Remember:– When supply of a good or service increases, the When supply of a good or service increases, the
equilibrium price of the good or service falls and equilibrium price of the good or service falls and the equilibrium quantity of the good or service the equilibrium quantity of the good or service rises.rises.
Supply and Demand BOTH shiftingSupply and Demand BOTH shifting
• An event happens and it can shift both An event happens and it can shift both the demand and supply curves at the the demand and supply curves at the same timesame time
Simultaneous Shifts of Supply and DemandSimultaneous Shifts of Supply and Demand
Quantity of coffeeQuantity of coffeeQQ22QQ
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One possible outcome: Price Rises, Quantity One possible outcome: Price Rises, Quantity RisesRises
Price of coffeePrice of coffee
Simultaneous Shifts of Supply and DemandSimultaneous Shifts of Supply and Demand
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PP22
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Another Possibility Outcome: Price Rises, Another Possibility Outcome: Price Rises, Quantity FallsQuantity FallsPrice of coffeePrice of coffee
Quantity of coffeeQuantity of coffee
