Supply and Demand Market Price and Output

Lesson Objectives To understand and be able to illustrate a market To be able to illustrate and explain market equilibrium and how this changes To e able to explain disequilibrium and the concept of market forces and the price mechanism

A market is defined as a place where buyers and sellers meet to exchange goods and services Examples of markets? Markets are illustrated using supply and demand curves together.

Equilibrium When a market is in equilibrium it means it is in a state of balance. Market equilibrium occurs where supply equals demand. When planned supply meets planned demand we can determine the equilibrium price (known as the ‘market price’) and the equilibrium quantity traded in a market.

S1 D1 Qe Pe E Price Quantity Equilibrium Price= Pe (market price) Equilibrium Output= Qe

Assuming markets are competitive and consumers and producers follow their self interests (utility and profit maximisers) then scarce resources can be allocated efficiently via the price mechanism

Disequilibrium When demand and supply are not equal a state of disequilibrium will occur Market forces (the ‘invisible hand’) should move price back to it’s equilibrium

S1 D1 Qe Pe E Price Quantity P1 P2 Excess Supply Excess Demand

Excess supply- producers have to lower prices to sell output. This downward pressure on price is sometimes known as a ‘buyers market’ Excess demand- prices are ‘bid up’- ‘sellers market’ The price mechanism ensures that a free market (a market with no government intervention) will always end up in equilibrium Read handout The Functions of Price and the Allocation of Scarce Resources

Recall What factors cause a shift in demand? What factors cause a shift in supply?

Effect of an Increase in Demand Time periods – Momentary- supply is fixed – Short-run- the interval which must elapse before more can be supplied with existing capacity. At least one factor of production will remain fixed – Long run- the time interval long enough to change all factors of production – Now illustrate on your handouts

Momentary Period- Supply is fixed D1 Q1 P1 Price Quantity D2 Sm Pm

Short run S1 D1 Q1 P1 Price Quantity D2 P2 Q2

In the long run- new firms enter industry attracted by the new higher equilibrium price S1 D1 Q1 P1 Price Quantity D2 Q2 S2

Effect of an increase in supply In the short run, ceteris paribus, an increase in supply will lower the price, this in turn will cause an extension in demand Illustrate using a diagram

S1 D1 Q2 P2 Price Quantity S2 P1 Q1

S1 D1 Q2 P2 Price Quantity S2 P1 Q1

S1 D1 Q2 P2 Price Quantity S2 P1 Q1

Price Elasticity of supply and demand

On your worksheet… Illustrate- If Supply is inelastic what happens to equilibrium price and quantity when there is an increase in demand? Illustrate- If Demand is inelastic what happens to equilibrium price and quantity when there is an increase in supply? Illustrate- If Demand is elastic what happens to equilibrium price and quantity when there is an increase in supply?

Handout Activities… Multiple Choice Handout Supply and Demand Worksheet 1 Supply and Demand Worksheet 2

Producer and Consumer Surplus Illustrate on a diagram…

Quantity Q Price Producer Surplus P D Consumer Surplus E S A B

S1 D1 Q1 P1 Price Quantity D2 P2 Q2