Equilibrium Market Prices How the interaction of demand and supply determines equilibrium prices in a market economy

Aims of today To reinforce factors that cause a movement & a shift in Demand & Supply curves To introduce the theory of equilibrium To develop skills in drawing D & S diagrams!

The concept of market equilibrium AS Economics The concept of market equilibrium Equilibrium means a state of equality between demand and supply Without a shift in demand and/or supply there will be no change in market price Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market

Demand and Supply Schedules for Oil At what point is the market in Equilibrium? What is the market situation … at $20? What is the market situation … At $8?

Demand and Supply Schedules for Oil

The Market Equilibrium Supply (S) Demand (D)

Is there such a thing as too much or too little? It’s all in excess!

Excess Demand – Market shortage Supply (S) Demand (D) When market price is lower than the market equilibrium, demand exceeds supply (a market shortage) There is therefore upward pressure on market price

Excess Supply – market surplus Supply (S) Demand (D) When market price is higher than the market equilibrium, supply exceeds demand (a market surplus) There is therefore downward pressure on the market price

The equilibrium in a market Price Supply P3 Equilibrium Point – a market clearing point where supply = demand P1 P2 Demand Q1 Quantity

& impact on equilibrium….. Shifts in Demand & impact on equilibrium….. What is the effect of an inward shift in Demand? Using your whiteboard Draw an Equilibrium diagram

Changes in market demand An Inward Shift in Demand An Outward Shift in Demand Price Price Supply Supply P3 P1 P1 P2 D3 D1 D1 D2 Q2 Q1 Quantity Q1 Q3 Quantity

& the impact on equilibrium Shifts in Supply & the impact on equilibrium

Changes in market supply The supply curve may shift outwards if there is A fall in the costs of production (e.g. a fall in labour or raw material costs) A government subsidy to producers that reduces their costs for each unit supplied Favourable climatic conditions causing higher than yields for agricultural commodities A fall in the price of a substitute in production An improvement in production technology leading to higher productivity and efficiency in the production process The entry of new suppliers (firms) into the market which leads to an increase in total market supply available to consumers

Changes in market supply Price Quantity S1 Q1 D1 P1 Q3 P3 D2 Q2 An Outward Shift in Supply An Inward Shift in Supply S2 P2 S3

Your go…..

Draw an Equilibrium diagram - and then show… What will happen to equilibrium price and quantity of butter in each of the following cases? You should SHOW whether demand or supply (or both) have shifted and in which direction…. A rise in the price for bread An expected rise in the price of butter in the near future A rise in the price of margarine A tax on butter production A rise in the demand for yoghurts The invention of a new but expensive process for removing all cholesterol from butter plus the passing of a law which states that all butter producers must use this process.

So… what happens if both Demand & Supply shift? ….we’ll look into this further next lesson!

Shifts in market demand and market supply An Inward Shift in Demand and a fall in Supply An Outward Shift in Demand and a Rise in Supply Price Price S2 S1 S1 S2 D3 D1 D1 D2 Quantity Quantity

Equilibrium worksheet Homework Equilibrium worksheet

Plenary Identify 3 factors that could be the cause of a shift in demand for chocolate! Identify 3 factors that could shift the supply of coffee. Can anyone explain in words the concept of equilibrium?