MARKET CHANGE USING ECONOMIC CONCEPTS TO UNDERSTAND HOW AND WHY PRICES AND QUANTITIES CHANGE OVER TIME – THROUGH THE INTERACTION OF BUYERS AND SELLERS

EXPLICITLY IDENTIFYING THE SUPPLY CURVE OPPOSITE OF THE DEMAND CURVE, SUPPLY CURVE SAYS PRODUCERS WANT TO MAKE AND SELL MORE THE HIGHER THE PRICE (PER UNIT)

EQUILIBRIUM PRICE PRICE WHICH MAKES THE QUANTITY WHICH BUYERS WANT TO PURCHASE THE SAME AS THE QUANTITY WHICH PRODUCERS WANT TO MAKE AND SELL

PRICE HIGHER THAN EQUILIBRIUM PRICE HAVE “EXCESS SUPPLY” AND PRICE WILL FALL TO THE EQUILIBRIUM PRICE

PRICE LOWER THAN EQUILIBRIUM PRICE HAVE “EXCESS DEMAND” AND PRICE WILL RISE TO THE EQUILIBRIUM PRICE

FOUR “RULES” ON MARKET CHANGE 1.INCREASE IN DEMAND – PRICE UP 2.DECREASE IN DEMAND – PRICE DOWN 3.INCREASE IN SUPPLY – PRICE DOWN 4.DECREASE IN SUPPLY – PRICE UP THESE PRICE CHANGES CAN BE “MODERATED” IN “LONG RUN”

INCREASE IN DEMAND RESULT – PRICE UP MOTIVATES PRODUCERS TO MAKE AND SELL MORE MOVEMENT “UP” THE SUPPLY CURVE

DECREASE IN DEMAND PRICE DOWN LOWER PRICE MOTIVATES PRODUCERS TO MAKE AND SELL LESS MOVEMENT “DOWN” THE SUPPLY CURVE

INCREASE IN SUPPLY PRICE DOWN MOTIVATES CONSUMERS TO BUY MORE MOVEMENT “DOWN” THE DEMAND CURVE

DECREASE IN SUPPLY PRICE UP MOTIVATES CONSUMERS TO BUY LESS MOVEMENT “UP” THE DEMAND CURVE

PREVIOUS EXAMPLES ARE “SHORT RUN” CHANGES - # FIRMS DON’T CHANGE IN “LONG RUN”, FIRMS CAN MOVE IN AND OUT OF THE MARKET TO ADD FURTHER CHANGES (EXCEPT IN CASE OF A MONOPOLY )

EXAMPLE – DEMAND FOR APPLES INCREASES – INITIALLY PRICE UP BUT THEN NEXT SEASON, MORE FARMERS GROW APPLES – SUPPLY INCREASES – AND PRICE MOVES DOWN NEW PRICE (P*) COULD BE HIGHER OR LOWER THAN ORIGINAL PRICE (P1)

EXPLAINING TODAY’S HOUSING MARKET DEMAND DOWN DUE TO THE RECESSION PRICE DOWN BUT BUILDERS BUILT LESS, SO SUPPLY FELL EVENTUALLY CAUSED PRICES TO RISE – AND THEY ARE!

IMPACT OF A GOVERNMENT IMPOSED PRICE CEILING DEMAND IS GREATER THAN SUPPLY AT THE CEILING PRICE A “SHORTAGE” IS CREATED SHORTAGE IS ELIMINATED BY NON-PRICE FACTORS – WAITING TIMES, RESTRICTIONS ON WHEN TO BUY

IMPACT OF A GOVERNMENT IMPOSED PRICE FLOOR SUPPLY IS GREATER THAN DEMAND AT PRICE FLOOR A “SURPLUS” IS CREATED SURPLUS MUST BE ELIMINATED BY DESTROYING OR STORING SOME OF THE PRODUCT