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Demand and supply
Equilibrium
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Supply and demand together
Put supply and demand curves on thesame graph
Intersection gives the equilibrium priceand quantity
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D
SPrice
Quantity
PE
QE
PE and QE represent the equilibrium price and
quantity
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What isEquilibrium Price?
The price that equates the quantity
demanded and the quantity supplied
1999 South-Western College Publishing
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Equilibrium
Equilibrium Price- the price at whichthe quantity demanded is equal to thequantity supplied. Other things being
unchanged, there is no tendency for thisprice to change.
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Equilibrium
A market is in equilibriumwhen thequantity demanded is equal to quantitysupplied at the market price.
At the equilibrium market price there areexactly the same number of goods that
suppliers are willing to sell as consumersare willing to buy.
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Equilibrium
When a market is in equilibrium there isno tendency for price or quantity to
change.
Economists often refer to equilibrium as
the "market clearing price" where allwilling sellers find all willing buyers.
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Market Equilibrium (Verbal)
The equilibrium price and quantity in amarket occur at the price where the quantitydemanded equals the quantity supplied.
Example: for the demand and supply curvesused, the equilibrium price is 17, where thequantity demanded, 23, equals the quantitysupplied, 23.
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Market Equilibrium (Table)
At a price of 17, the quantity demanded isequal to the quantity supplied, as thetable below illustrates.
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Market Equilibrium (Graph)
The market equilibrium occurs at theintersection of the supply and demand curves.
At price = 17, the quantity supplied = quantity
demanded = 23.
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Market Equilibrium (Equations)
The equilibrium price and quantity satisfyboth the demand and supply equationssimultaneously.
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REVIEW
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Product Demand, Supply and Market Prices
The market "clears"
at the point whereall the supply anddemand at a givenprice balance.
That is, the amountof a commodityavailable at a givenprice equals the
amount that buyersare willing topurchase at thatprice.
SD
S D
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Product Demand, Supply and Market Prices
It is assumed that there
is a process that willresult in the marketreaching this point, butexactly what the processis in a real situation is an
ongoing subject ofresearch.
Markets which do not
clear will react in someway, either by a changein price, or in theamount produced, or inthe amount demanded.
S
D
S D
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Product Demand, Supply and Market Prices
Graphically the
situation can berepresented bytwo curves:
one showing the
price-quantitycombinationsbuyers will payfor, or the demandcurve;
and one showingthe combinationssellers will sell for,or the supplycurve.
SD
S D
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Product Demand, Supply and Market Prices
The market clears
where the two arein equilibrium, thatis, where thecurves intersect.
In a generalequilibrium model,all markets in allgoods clear
simultaneouslyand the "price"can be describedentirely in terms oftradeoffs with
other goods.
SD
S D
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Disequilibrium
Non-equilibriumprices can occurin free marketsbecause of
imperfectinformation anduncertainty, but itusually doesn'tlast for long.
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What happens if price is below
equilibrium?
A shortage, or excess demand,
arises
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D
S
P2
19
QDQS
At P2, QD > QS, thus a shortage or excessdemand exists
Shortage
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How is the shortage
eliminated?The price rises, leading to a
decrease in quantity demanded
and an increase in quantitysupplied.
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Disequilibrium
When demandexceeds supply, themarket price will rise
If, at the currentprice, consumers areunable to buy asmuch as they wouldlike to buy, they
may offer higherprices in an effort toget more of theavailable supply forthemselves.
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What happens if price is
above equilibrium?
A surplus, or excess supply, arises
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D
SP1 Surplus
23
QD QS
At P1, QD < QS, thus a surplus or excess supply exists
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How is the surplus eliminated?
The price falls, leading to a
decrease in quantity supplied andan increase in quantity demanded.
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Disequilibrium
If there is excesssupply, it meansthat producerscannot sell all
that they wish tosell at thecurrent price.
When supplyexceeds demand,the market price
will fall
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Disequilibrium
If there is excesssupply, they maythen begin tooffer to sell at
lower prices, forexample throughclearance sales ordiscounts.
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Disequilibrium
If purchasersobserve the glutof unsold outputthey may begin tooffer lower prices.
For either(previous slide) orboth of these
reasons, the pricein the market willfall.
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Disequilibrium
This law of price adjustment makes considerablesense and conforms with common experiences ofhow markets workshortages of any producttend to lead to price rises while gluts tend to leadto price falls.
Most importantly, it implies that prices will movetowards the level at which demand and supplywill be equal.
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Disequilibrium
The combination of a negatively sloped demandcurve and a positively sloped supply curve withthe law of price adjustment will guarantee astable market, so long as any market in thisproduct exists (that is, provided the demand
and supply curves intersect at some positiveprice and quantity).
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The equilibrium price
The term equilibrium means a state ofbalance; it occurs when desired purchasesequal desired sales and there are no
forces tending to make anything change.
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The equilibrium price
When quantity demanded equals quantitysupplied, we say that the market is inequilibrium.
The equilibrium price corresponds to theintersection of the demand and supply
curves.
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The equilibrium price
At pricesaboveequilibrium
there isexcesssupply anddownward
pressureon price.
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The equilibrium price
At pricesbelowequilibrium
there isexcessdemand
and upwardpressure onprice.
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D
S
P3
Q3
P1 Surplus
P2
Shortage
341999 South-Western College Publishing
Summary, shortages, surpluses, and equilibrium
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Conclusion
Whatever the market in which we areinterested, the analysis of how demandand supply interact to determine the
market-clearing price is an essential tool.
It is applicable to all situations in which
some maker or owner of a product wishesto exchange the product with a potentialuser.
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How shifts in S and D affect
equilibrium price and quantity
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S
D2P1
Right Shift in Demand
P2
Q2Q1D1
371999 South-Western College Publishing
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Summary, demand changes
Increased demand, price and quantity
both rise
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S1
D1
Left Shift in Demand
D2
P2
Q2
P1
Q1391999 South-Western College Publishing
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Summary, demand changes
Decreased demand, price and quantityboth fall
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S1
S2P1
Right Shift in Supply
P2
Q2Q1D
4
1
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Summary, supply changes
Increased supply, price falls, quantity rises
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S2
S1P2
Left Shift in Supply
P1
Q1Q2D
4
3
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Summary, supply changes
Decreased supply, price rises, quantityfalls
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If both curves shift, you canpredict price or quantity, but not
both unless the magnitude ofthe shifts are known
E l hift i b th S d
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Examples: shifts in both S andD curves
Say both S and D increase, what can wesay about equilibrium P and Q?
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Q will increase, but P isindeterminate
ANSWER
E l hift i b th S d
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Examples: shifts in both S andD curves
Say S increases but D decreases, what canwe say about equilibrium P and Q?
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P will decrease, but Q isindeterminate
ANSWER:
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Supply and demand problems
Suppose apples and oranges are substitutes toconsumers:
Bad weather destroys many apple orchards--what happens to equilibrium price andquantity in the apple market?
In the Orange market??
Illustrate graphically.
S1S
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P P
Q Q
S
D
D1P1
P2
Q1Q2
Apple market, supply
decreases, price rises,
quantity falls
D
S
Orange market, demand
increases, price and
quantity rise
P1
P2
Q1 Q2
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Oprah Winfrey says on tv that
she will never eat anotherhamburger. What might
happen to the equilibrium price
and quantity in the beef
market? Show graphically
with supply and demandcurves.
Decrease in demand in the bee
f
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S1
D1
Decrease in demand in the beef
market, price and quantity fall
D2
P2
Q2
P1
Q153
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The demand for computers has clearly
increased over time, due to higher incomes
and changing preferences towardscomputers.
Despite the increased demand, the price ofcomputers has continued to fall.
Show graphically with supply and
demand curves how this could happen, andgive some possible explanations.
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S
S1
D
D1
P1
P2
P3
If supply increases more than demand, price
falls--greater supply due possibly to lower input
costs, better technology, more firms
An increase in the wages paid to
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An increase in the wages paid tofishermen will have what effect on thefish market equilibrium?
a. Price will decrease, and quantitywill decrease.
b. Price will increase, and quantitywill increase. c. Price will decrease, and quantity
will increase. d. Price will increase, and quantity
will decrease. e. Price and quantity will stay the
same.
Over the past couple of years prices for personal
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Over the past couple of years, prices for personalcomputers have fallen dramatically, but suppliershave offered more and more of them for sale.
Does this refute the law of supply? Explain.
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THE END