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Meeting between the Supply and Demand The Price System Meeting between the Supply and Demand

DEMAND & SUPPLY P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Market Clearing Equilibrium $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

Understanding Surpluses & Shortages Table 3.8 Market Supply of and Demand for Corn (1) Total Quantity Supplied per Week (2) Price per Bushel (3) Total Quantity Demanded per Week (4) Surplus (+) or Shortage (-)* 12,000 $5 2,000 +10,000  10,000 $4 4,000 +6,000  7,000 $3 $2 11,000 -7,000  1,000 $1 16,000 -15,000 

Market Equilibrium Market equilibrium is a situation in which the quantity of a product demanded equals the quantity supplied, so there is no pressure to change the price.

DEMAND & SUPPLY P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

DEMAND & SUPPLY Shortage P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS At a $2 price more is being demanded than supplied $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

Market Equilibrium Excess demand is a situation in which, at the prevailing price, consumers are willing to buy more than producers are willing to sell. Another word for excess demand is shortage

Market Equilibrium Excess demand causes the price to rise. The market moves upward along the demand curve, decreasing the quantity demanded, and upward along the supply curve, increasing the quantity supplied.

MARKET DEMAND & SUPPLY Surplus P QD P QS $5 4 3 2 1 2,000 4,000 7,000 Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS At a $4 price more is being supplied than demanded $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

Market Equilibrium Excess supply is a situation in which, at the prevailing price, producers are willing to sell more than consumers are willing to buy. Another way to express excess supply is surplus

Market Equilibrium Excess supply causes the price to fall. The market moves downward along the demand curve, increasing the quantity demanded, and downward along the supply curve, decreasing the quantity supplied.

Market Effects of Changes in Demand A change in demand is a change in the amount of a good demanded resulting from a change in something other than the price of the good. An increase in demand is represented graphically by a shift of the demand curve to the right.

Causes of an Increase in Demand An increase in demand can occur for several reasons: Income Effect Substitute Effect (includes compliments) Consumer Taste

Market Effects of an Increase in Demand At the initial price ($8), the shift of the demand curve causes excess quantity demanded. Equilibrium is restored at point n, with a higher equilibrium price and a larger equilibrium quantity.

Causes of a Decrease in Demand A decrease in demand can occur for several reasons: Income Effect Substitute Effect Consumer Tastes

Market Effects of a Decrease in Demand A decrease in demand shifts the demand curve to the left. At the initial price ($8), there is now an excess supply. Equilibrium is restored at point n, with a lower equilibrium price ($6) and a smaller equilibrium quantity (20,000 pizzas).

Market Effects of Changes in Supply A change in supply is a change in the amount of a good supplied resulting from a change in something other than the price of the good. An increase in supply is represented graphically by a shift of the supply curve to the right.

Market Effects of Changes in Demand A change in supply is a change in the amount of a good supplied resulting from a change in something other than the price of the good. A decrease in supply is represented graphically by a shift of the supply curve to the left.

Causes of an Increase in Supply An increase in supply shifts the supply curve to the right when: Price of Resources Technology Competition Future Expectations Government Regulations and Subsidies

Market Effects of an Increase in Supply At the initial price ($8), the shift of the supply curve causes excess quantity supplied. Equilibrium is restored at point n, with a lower equilibrium price and a larger equilibrium quantity.

Causes of a Decrease in Supply A decrease in supply shifts the supply curve to the left when: Price of Resources Technology Competition Future Expectations Government Regulations and Taxes

Market Effects of a Decrease in Supply At the initial price ($8), the decrease in supply curve causes excess quantity demanded. Equilibrium is restored at point n, with a higher equilibrium price and a smaller equilibrium quantity.

Market Effects of Changes in Demand or Supply Change in Demand or Supply Change in Price Change in Quantity Increase in demand Increase Decrease in demand Decrease Increase in supply Decrease in supply

Types of Elasticity Inelastic demand defines a good that you will keep buying despite a price increase. If elasticity is less than 1, it is inelastic. Elastic demand defines a drastic reaction and decrease in buying a good after only a small price increase. If elasticity is greater than 1, demand is elastic. Unitary elastic: If elasticity is exactly 1, it is unitary elastic. Explain how to calculate the elasticity of demand. Elasticity of demand is the way consumers respond to price changes, and how drastically buyers will cut back or increase their demand for a good when price rises or falls. This defines buyers, not the goods. To calculate elasticity, divide the percentage change in demand by the percentage change in price. What factors affect elasticity? Availability of substitutes. If price rises a lot but there’s no substitute, will likely still buy it. (Concert tickets, life-saving medicine) Relative importance. If shoelaces price went up, probably wouldn’t matter. Wouldn’t even notice. Necessities vs Luxuries How people see the goods they buy, milk vs. steak. Most people have elastic demand when it comes to luxuries. Change over time Demand can become elastic over time as people find substitutes What is the relationship between elasticity of supply and time? Elasticity of supply is a measure of the way suppliers respond to a change in price. The key factor to supply elasticity is time. Hard to change output in the short-run, so its inelastic whether prices increases or decreases (ex. An orange grove or apple orchard), but becomes more elastic as firms adjust and produce more. Some supply, like haircuts, are highly elastic. Price goes up, hire more barbers. What are some examples of elastic goods? What are some examples of inelastic goods? Elastic goods: Heinz soup. These days there are many alternatives to Heinz soup. If price rises, people will switch to less expensive varieties. Shell petrol. We say that petrol is overall inelastic. But, if an individual petrol station increases price, people will buy from other petrol stations. The only exception is if a petrol station has a local monopoly – e.g. at service station on the motorway there is a captive audience. But, in a city centre with many alternatives, people will have an elastic demand. Tesco bread. Tesco bread will be highly price elastic because there are many better alternatives. If the price of Tesco bread rises, consumers will switch to alternatives, such as Kingsmill. Daily Express. If the Daily Express increases in price, there are similar newspapers people will switch to. For example, the Daily Mail or Daily Mirror. If it was a newspaper like the Financial Times of the Economist, demand would be more inelastic, as there is no close substitute to the Financial Times. Kit Kat chocolate bar. If Kit Kats increase, people will switch to alternative types of chocolate bar. Inelastic goods: Petrol – petrol has few alternatives because people with a car need to buy petrol. For many driving is a necessity. ... Salt. ... A good produced by a monopoly. ... Tap water. ... Diamonds. ... Peak rail tickets. ... Cigarettes. ... Apple iPhones, iPads.