2.3 How Competitive Markets Operate In competitive markets, demand and supply play a key role in coordinating the decisions of consumers and producers Market Equilibrium The stable point at which demand and supply curves intersect Surplus – Low demand for a product but high supply Shortage – High demand for a product but low supply Role of Price – If there is either a shortage or surplus, the price will change until equilibrium is attained

Changes in Demand Let D1 be the demand for strawberries currently. For a quantity q1, it costs p1. If the price of cherries suddenly increases, there is a higher demand for strawberries now – D2. With demand D2, the price is still P1, and so there will be a shortage in supply of strawberries (higher demand, same price) To correct this, the price must increase to p2 so that equilibrium is once again reached

Changes in Supply Let S be the supply for strawberries currently. For a quantity Q, it costs P. If new producers enter the industry, the supply curve will move since there are more strawberries being supplied – S1 With more supply at the same price, there is a surplus of products (Q1 – Q) To correct this, price falls until a new equilibrium point is reached, so price drops from P to P1

How Changes Affect Each Other When demand of a product increases, supply of the product increases When demand of a product decreases, supply of that product decreases If shift in supply and demand is the same, then equilibrium is maintained – price remains the same, quantity increases

How Changes Affect Each Other If shift in demand curve is less than shift in supply curve, then equilibrium price falls If shift in the demand curve is more than shift in supply curve, then equilibrium price rises If demand increases and supply decreases by the same amount, the equilibrium price increases at the eq. quantity Try to sketch these for yourself and test your knowledge