E QUILIBRIUM

M ARKET D EMAND This is the total demand of all individual consumers in a market at a given time for all prices. It is found by horizontally adding all individual demand schedules or curves = 12 P Q P Q Q P DD D

E XAMPLE Emma’s demand for pies weekly PriceQuantity demanded Geoff’s demand for pies weekly PriceQuantity demanded Rob’s demand for pies weekly PriceQuantity demanded Market Demand for pies weekly PriceQuantity demanded

Weekly Market Demand Curve for Pies Quantity Demanded (Each) Price($) MD

M ARKET S UPPLY This is the total Supply of all individual producers in a market at a given time for all prices. It is found by horizontally adding all individual supply schedules or curves = 12 P Q P Q Q P S S S

M ARKET S UPPLY S CHEDULE - E XAMPLE Cam’s Takeaway's weekly supply for pies Price ($) Quantity supplied Scott’s Fasta Food weekly supply for pies Price ($) Quantity supplied Mike’s Munchies weekly supply for pies Price ($) Quantity supplied Market Demand for pies weekly Price ($) Quantity supplied

Weekly Market Supply Curve for Pies Quantity Supplied (Each) Price($) MS

M ARKET E QUILIBRIUM Equilibrium is the point where market demand and market supply cross Market equilibrium determines the price. Called equilibrium price At this price quantity supplied exactly equals quantity demanded. So everyone prepared to buy at that price (consumers) gets what they want and everyone prepared to sell at that price (producers) do so. At this price the market is stable and there is no pressure for the price to change.

M ARKET E QUILIBRIUM s d Q P Pe Qe Market equilibrium occurs at the price where the quantity demanded equals the quantity supplied. This occurs at Pe. At this price both quantity demanded and quantity supplied is Qe. Equilibrium is a state of balance. There are no shortages or surpluses.

W ORKSHEET – M ARKET EQUILIBRIUM

D ISEQUILIBRIUM Disequilibrium occurs if the existing price is either above or below equilibrium price If the price is above equilibrium price, quantity supplied will be higher than quantity demanded and results in a surplus. Surplus (Excess supply) = QS >QD If the price is below equilibrium, quantity demanded will be higher than quantity supplied and results in a shortage. Shortage (Excess demand) = QD>QS

D ISEQUILIBRIUM ShortageSurplus

D O – N OW Weekly market for TG20 mobile phones Price ($)Market demandMarket supply Complete the worksheet on market equilibrium. Make sure you make your axis even and label as the question asks. (Price is on the VERICAL axis)

M ARKET R EACTION TO D ISEQUILIBRIUM ' S Complete the worksheet “ Two disequilibrium situations”

S URPLUS (E XCESS S UPPLY ) P QD QS Surplus At the current price of $20 quantity demanded is 200 and Quantity supplied is 700 A surplus of 500 exists ( )

M ARKET FORCES RESTORING EQUILIBRIUM E XCESS S UPPLY ( S URPLUS ) 1. The producer will want to sell their excess stock so will react by dropping the price of their product 2. Consumers will react to lower prices by buying more as the goods become more affordable (Law of demand) 3. As prices fall producers decrease their supply as the good becomes less profitable (Law of supply) 4. QD increases and QS decreases until equilibrium is restored at a price of $10 and quantity of 500.

S HORTAGE (E XCESS D EMAND ) P QDQS At the current price of $5 quantity demanded is 650 and Quantity supplied is 300 A shortage of 350 exists ( ) Shortage

M ARKET FORCES RESTORING EQUILIBRIUM E XCESS D EMAND (S HORTAGE ) 1. The Consumers want to buy more of the goods so they are prepared to pay higher prices. Consumers bid the price up as they don’t want to miss out. 2. Producers will react to higher prices by supplying more as the good becomes more profitable (Law of Supply) 3. As prices increase, consumers demand falls as the good becomes less affordable (Law of demand ) 4. QS increases and QD decreases until equilibrium is regained where QD=QS (At a price of $10 and quantity of 500)

W ORKBOOK PAGES

M ARKET REACTIONS TO D ISEQUILIBRIUM When the market is not in equilibrium we call this a disequilibrium. When the market is in a disequilibrium, there will be pressure on the market. These pressures are from the needs of consumers for goods and services (demand) and the need of producers to sell their goods and services (supply) These pressures are known as market forces or ‘the invisible hand’.

C HANGES TO EQUILIBRIUM A change to any of the variables that cause a shift in either demand or supply will cause a change in the equilibrium price and quantity. Factors that shift the demand curve Tastes and preferences Income Complements Substitutes Factors that shift the supply curve Price of related good Technology Productivity Cost of Production

E XAMPLE – C HANGES IN D EMAND An increase in demand caused by an increase in consumer incomes s d Q Price ($) Pe Qe d' P1 Q1 At the new equilibrium prices have increased and quantity has increased

E XAMPLE – C HANGES IN S UPPLY A decrease in supply caused by cost of production increasing s d Price ($) Pe Qe s’ Qe’ Pe’ At the new equilibrium price has increased and quantity has decreased