Supply and Supply and DemandDemand
Supply and Supply and DemandDemand
Pricing and Market Equilibrium
Pricing and Market Equilibrium
©© 2002 by Nelson, a division of Thomson Canada Limited 2002 by Nelson, a division of Thomson Canada Limited©© 2002 by Nelson, a division of Thomson Canada Limited 2002 by Nelson, a division of Thomson Canada Limited
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 2
SUPPLY AND DEMAND SUPPLY AND DEMAND TOGETHERTOGETHER
• Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.
• Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 3
EquilibriumEquilibrium
• Equilibrium Price– The price that balances quantity supplied and
quantity demanded. – On a graph, it is the price at which the supply
and demand curves intersect.• Equilibrium Quantity
– The quantity supplied and the quantity demanded at the equilibrium price.
– On a graph it is the quantity at which the supply and demand curves intersect.
• Equilibrium Price– The price that balances quantity supplied and
quantity demanded. – On a graph, it is the price at which the supply
and demand curves intersect.• Equilibrium Quantity
– The quantity supplied and the quantity demanded at the equilibrium price.
– On a graph it is the quantity at which the supply and demand curves intersect.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 4
At $2.00, the quantity demanded is equal to the quantity supplied!
Demand Schedule
Supply Schedule
EquilibriumEquilibrium
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 5
Equilibrium price
Demand
Supply
$2.00
6 8 100
Equilibrium
Equilibrium quantity
Quantity of Ice-Cream Cones
Price of Ice-Cream
Cone
421 3 5 7 9 11
Figure 4-8: The Equilibrium of Supply and Figure 4-8: The Equilibrium of Supply and DemandDemand
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 6
EquilibriumEquilibrium
• Surplus– When price > equilibrium price, then quantity
supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales,
thereby moving toward equilibrium.
• Shortage– When price < equilibrium price, then quantity
demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
• Surplus– When price > equilibrium price, then quantity
supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales,
thereby moving toward equilibrium.
• Shortage– When price < equilibrium price, then quantity
demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 7
Demand
Supply
$2.00
6 8 100 Quantity of Ice-Cream Cones
Price of Ice-Cream
Cone
421 3 5 7 9 11
$2.50
Surplus
Quantity Demanded
Quantity Supplied
Figure 4-9 a): Excess SupplyFigure 4-9 a): Excess Supply
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 8
Demand
Supply
$2.00
6 8 100 Quantity of Ice-Cream Cone
Price of Ice-Cream
Cone
421 3 5 7 9 11
$1.50
Shortage
Quantity Supplied
Quantity Demanded
Figure 4-9 b): Excess DemandFigure 4-9 b): Excess Demand
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 9
Three Steps To Analyzing Three Steps To Analyzing Changes in EquilibriumChanges in Equilibrium
• Decide whether the event shifts the supply or demand curve (or both).
• Decide whether the curve(s) shift(s) to the left or to the right.
• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.
• Example: A Heat Wave
• Decide whether the event shifts the supply or demand curve (or both).
• Decide whether the curve(s) shift(s) to the left or to the right.
• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.
• Example: A Heat Wave
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 10
D1
Supply
$2.00
6 100 Quantity of Ice-Cream Cone
Price of Ice-Cream
Cone
421 3 5 7 11
D2
$2.50
1. Hot weather increases the demand for ice cream…
2. … resulting in a higher price …
3. … and a higher quantity sold.
New equilibrium
Initial equilibrium
Figure 4-10: How an Increase Demand Figure 4-10: How an Increase Demand Affects the EquilibriumAffects the Equilibrium
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 11
Demand
S1
$2.00
100 Quantity of Ice-Cream Cones
Price of Ice-Cream
Cone
421 3 7 11
S2
$2.50
1. An earthquake reduces the supply of ice cream…
2. … resulting in a higher price …
3. … and a lower quantity sold.
New equilibrium
Initial equilibrium
Figure 4-11: How a Decrease Demand Figure 4-11: How a Decrease Demand Affects the EquilibriumAffects the Equilibrium
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 12
D1
S1
0 Quantity of Ice-Cream Cone
Price of Ice-Cream
Cone
Q1
D2
Large increase in demand
P2
S2
Q2
New equilibrium
Small decrease in supply
Initial equilibriumP1
Figure 4-12 a): A Shift in Both Supply and Figure 4-12 a): A Shift in Both Supply and DemandDemand
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 13
D1
S1
0 Quantity of Ice-Cream Cone
Price of Ice-Cream
Cone
Q1
D2
Large decrease in supply
P2
S2
Q2
New equilibrium
Small increase in demand
Initial equilibriumP1
Figure 4-12 b): A Shift in Both Supply and Figure 4-12 b): A Shift in Both Supply and DemandDemand
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 14
Table 4-8: What Happens to Price and Table 4-8: What Happens to Price and Quantity when Supply or Demand ShiftsQuantity when Supply or Demand Shifts
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 15
Concluding Remarks…Concluding Remarks…
• Market economies harness the forces of supply and demand. . .
• Supply and Demand together determine the prices of the economy’s different goods and services. . .
• Prices in turn are the signals that guide the allocation of resources.
• Market economies harness the forces of supply and demand. . .
• Supply and Demand together determine the prices of the economy’s different goods and services. . .
• Prices in turn are the signals that guide the allocation of resources.
Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 16
SummarySummary
• Market equilibrium is determined by the intersection of the supply and demand curves.
• At the equilibrium price, the quantity demanded equals the quantity supplied.
• The behavior of buyers and sellers naturally drives markets toward their equilibrium.
• Market equilibrium is determined by the intersection of the supply and demand curves.
• At the equilibrium price, the quantity demanded equals the quantity supplied.
• The behavior of buyers and sellers naturally drives markets toward their equilibrium.