Competitive Markets

Market Equilibrium In competitive markets, demand and supply play a key role in coordinating the decisions of consumers and producers Market Equilibrium: occurs when the quantity demanded of a good equals the quantity supplied of that good It is the point at which the demand and supply curves intersect There is no upward or downward pressure on the price; the market is in balance. In other words, the "market clears". At this point neither excess supply (surplus) or excess demand (shortage) exists.

Surplus: occurs when the quantity supplied exceeds the quantity demanded Surpluses occur when the price is above its equilibrium level When a surplus exists, producers have too much inventory building up . They have a glut of unsold goods. The only way for them to get rid of their inventories is by reducing their price. Shortage: occurs when the quantity supplied is less than the quantity demanded Shortage occur when the price is below the equilibrium level When a shortage exists, consumers "bid up" the prices of goods.

Example; Market demand and supply schedules for Strawberries At the same time, producers/retailers realize that the good they are selling is scarce and in demand. This allows them to raise their prices. Example; Market demand and supply schedules for Strawberries Price ($ per kg) Quantities (millions of kg) Surplus (+) or Shortage (-) D S 3.00 5 13 +8 2.50 7 11 +4 2.00 9 1.50 -4 1.00 -8

When price is $2.00 the quantity demanded equals the quantity supplied Thus, the equilibrium price is $2 and the equilibrium quantity demanded is 9 million kg

Effect of a Change in Demand on Equilibrium Example; Suppose that the market for Strawberries is in equilibrium The equilibrium price is $2/kg and quantity demanded is 9 kg Question: If there is an increase in the price of blueberries, what happens to the demand for Strawberries? The demand for strawberries will increase Price ($ per kg) Quantities (millions of kg) D0 D1 S 3.00 5 9 13 2.50 7 11 2.00 1.50 15 1.00 17

The demand curve shifts to the right Both price and quantity increase along the supply curve. The new equilibrium price is $2.50 and the new equilibrium quantity is 11 million kg.

Effect of a Change in Supply on Equilibrium Example; Suppose that the market for Strawberries is in equilibrium The equilibrium price is $2/kg and quantity demanded is 9 kg Question: If there is an increase in the number of suppliers, what happens to the supply for Strawberries? The supply of strawberries will increase Price ($ per kg) Quantities (millions of kg) D0 S0 S1 3.00 5 13 17 2.50 7 11 15 2.00 9 1.50 1.00

The supply curve shifts to the right The price decreases and quantity increases along the demand curve The new market price is $1.50 and the new quantity is 11 million kg

Changes in Market Equilibrium

Market Equilibrium Competition among buyers and among sellers drive the price toward equilibrium price. Price regulates buying and selling plans. Price adjusts when plans don’t match.

Changes in Supply and Demand When both supply and demand change, the effect is a combination of the individual effects. Case Change in Supply Change in Demand Effect on Equilibrium Price Effect on Equilibrium Quantity 1 Increase Decrease Indeterminate 2 3 4

Case#1 Suppose there is an increase in supply and a decrease in demand The demand curve shifts to the left The supply curve shifts to the right The equilibrium price decreases The equilibrium quantity may increase or decrease

Case#2 Suppose there is a decrease in supply and an increase in demand The supply curve shifts left The demand curve shifts right The equilibrium price increases The equilibrium quantity may increase or decrease

Case#3 Suppose there is an increase in supply and an increase in demand The demand curve shifts to the right The supply curve shifts to the right The equilibrium price may increase or decrease The equilibrium quantity increases

Case#4 Suppose there is an decrease in supply and an decrease in demand The demand curve shifts to the left The supply curve shifts to the left The equilibrium price may increase or decrease The equilibrium quantity decreases