Supply and Demand together at last!

SUPPLY and demand TOGETHER These two laws are directly contrary to each other. If suppliers want high prices, but buyers want low prices, how on earth does anything get traded? The point where: quantity supplied = quantity demanded supply demand

Supply and demand Market Equilibrium (aka market clearing price) EOC study guide Supply & Demand #4 Market Equilibrium (aka market clearing price) The point at which sellers are willing to sell as much as buyers are willing to buy Qd=Qs

Moving Toward Equilibrium EOC study guide Supply & Demand #7 Surplus is the condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above equilibrium. Shortage is the condition in which the quantity demanded of a good is greater than the quantity supplied. Shortage occur only at prices below equilibrium price.

Supply and Demand Interactions Relationship of quantity supplied Market (Qs) to quantity demanded (Qd) Condition Qs  Qd Surplus Qd  Qs Shortage Qd = Qs Equilibrium

Supply and demand Equilibrium or market clearing price How difficult is it to find this point? It is the single most difficult aspect of business All trial and error “In the Chips” Activity You will need a piece of paper and a pencil

Surplus (a.k.a. excess supply): Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Q Example: If P = $5, S D Surplus then QD = 9 lattes and QS = 25 lattes resulting in a surplus of 16 lattes 7

Surplus (a.k.a. excess supply): P Q Facing a surplus, sellers try to increase sales by cutting price. S D Surplus This causes QD to rise and QS to fall… …which reduces the surplus. 8

Surplus (a.k.a. excess supply): P Q Facing a surplus, sellers try to increase sales by cutting price. S D Surplus This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. 9

What happens to price when there is a surplus? Suppliers cannot sell all of their goods Inventory grows Expensive to store What happens to price? It lowers to the equilibrium price

Shortage (a.k.a. excess demand): Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P Q Example: If P = $1, S D then QD = 21 lattes and QS = 5 lattes resulting in a shortage of 16 lattes Shortage 11

Shortage (a.k.a. excess demand): P Q Facing a shortage, sellers raise the price, S D causing QD to fall and QS to rise, …which reduces the shortage. Shortage 12

Shortage (a.k.a. excess demand): P Q Facing a shortage, sellers raise the price, S D causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. Shortage 13

What happens to price when there is a shortage? Price is below equilibrium causing a high demand for the good and a low supply Buyers will pay higher prices for goods Higher prices motivate suppliers to produce more Price will rise until it reaches equilibrium