When Supply Met Demand

Learning Goals & Success Criteria By the end of today’s lesson I will… be able to explain how the interactions between consumers and producers in the market determines an equilibrium price using a model be able to distinguish between a shortage and surplus be able to determine the new equilibrium price and quantity when there is a change in demand or supply

recall: Demand The quantity of a good or service that buyers are willing and able to buy at all possible prices during a period of time. D P Q Demand curve – a graph of the relationship between the price of a good and the quantity demanded

recall: Supply The amount of a good or service that producers are willing and able to offer for sale at each possible price during a given period of time. S P Q Supply curve – a graph of the relationship between the price of a good and the quantity supplied

S D Equilibrium A situation in which the price has reached the level where quantity supplied equals quantity demanded Equilibrium Price (P E ) The price that balances quantity supplied and quantity demanded Equilibrium Quantity (Q E ) The quantity supplied and quantity demanded at the equilibrium price P Q Equilibrium When Supply Met Demand QEQE PEPE

Equilibrium At the equilibrium price, the quantity of the good buyers are willing to buy exactly balances the quantity that sellers are willing to sell. The equilibrium is sometimes called the market clearing price because, at this price, everyone in the market has been satisfied: Buyers can buy all they want to buy, and sellers can sell all they want to sell S D P Q QEQE PEPE

The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand When Demand Met Supply Activity Let’s consider what happens when the market price is not equal to the equilibrium price… So who determines price? Is it the consumer? The producer?

Markets not in Equilibrium If the price is set above equilibrium price, at $3.50 per cup of hot chocolate, the quantity of the good supplied (10 cups) exceeds the quantity demanded (4 cups) There is a surplus! 7 $2.75 S D Price of cups of hot chocolate Quantity of hot chocolate $ Surplus Q demandedQ supplied Market for Cups of Hot Chocolate 4

Surplus The situation that results when the quantity supplied of a product exceeds the quantity demanded. Generally happens because the price of the product is above the market equilibrium price. Suppliers are unable to sell what they want at the going price The suppliers’ response to a surplus is to cut their prices which leads to and increase in quantity demanded and decrease in quantity supplied Prices will continue to fall until the market reaches equilibrium

Markets not in Equilibrium If the price is set below equilibrium price, at $1.25 per cup of hot chocolate, the quantity of the good demanded (10 cups) exceeds the quantity supplied (4 cups) There is a shortage! 7 $2.75 S D Price of cups of hot chocolate Quantity of hot chocolate $ Shortage Q demandedQ supplied Market for Cups of Hot Chocolate 4

Shortage The situation that results when the quantity demanded for a product exceeds the quantity supplied. Generally happens because the price of the product is below the market equilibrium price. Demanders are unable to buy all they want at the going price When a shortage occurs in the hot chocolate market, buyers have to wait in long lines for a chance to buy one of the few cups that are available With too many buyers chasing too few goods, sellers respond to the shortage by raising their prices without losing sales As price rises, quantity demanded falls, quantity supplied rises and the market moves to equilibrium

Law of supply and demand The claim that the prices of any good adjusts to bring quantity supplied and the quantity supplied and the quantity demanded for that good into balance

Analysing changes in equilibrium What happens to equilibrium price and quantity when there is a change in supply? When there is a change in demand? Or both?

Increase in Demand Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 $3.00 S D1D1 D2D2 Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $3.00 Quantity: 8 When there is an increase in demand: Price Quantity Demanded Quantity Supplied 78 Market for Cups of Hot Chocolate

Decrease in Demand Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 $2.50 S D1D1 D2D2 Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $2.50 Quantity: 6 When there is an increase in demand: Price Quantity Demanded Quantity Supplied 76 Market for Cups of Hot Chocolate

Increase in Supply Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 $2.50 D S1S1 Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $2.50 Quantity: 8 When there is an increase in demand: Price Quantity Demanded Quantity Supplied 78 S2S2 Market for Cups of Hot Chocolate

Decrease in Supply Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 $3.00 D S1S1 Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $3.00 Quantity: 6 When there is an increase in demand: Price Quantity Demanded Quantity Supplied 76 S2S2 Market for Cups of Hot Chocolate

Shifts in both Demand and Supply Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 S1S1 7 D2D2 Increase in Demand & Increase in Supply Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $2.75 Quantity: 7.5 In this particular situation… Price stayed the same Quantity Demanded Quantity Supplied S2S2 D1D1 Market for Cups of Hot Chocolate 7.5

Shifts in both Demand and Supply Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 S1S1 7 D2D2 S2S2 D1D1 Market for Cups of Hot Chocolate 7.5 In a situation where both supply and demand shift in the same direction the new equilibrium price does not always stay the same as the initial equilibrium price. In fact, the effect on price will vary depending on the severity of the supply and demand shifts.

Shifts in both Demand and Supply Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 S1S1 7 D2D2 Decrease in Demand & Decrease in Supply Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $2.75 Quantity: 7.5 In this particular situation… Price stayed the same Quantity Demanded Quantity Supplied S2S2 D1D1 Market for Cups of Hot Chocolate 5

Shifts in both Demand and Supply Price of cups of hot chocolate Quantity of cups of hot chocolate $2.75 $3.25 S1S1 7 D2D2 Increase in Demand & Decrease in Supply Initial Equilibrium Price: $2.75 Quantity: 7 New Equilibrium Price: $3.25 Quantity: 7.5 In this particular situation… Price Quantity Demanded Quantity Supplied S2S2 D1D1 Market for Cups of Hot Chocolate 7.5

Shifts in both Demand and Supply Summary! DEMAND SUPPLY EQUILIBRIUM PRICE EQUILIBRIUM QUANTITY DEMANDSUPPLYEQUILIBRIUM PRICE EQUILIBRIUM QUANTITY  indeterminate     