1. Supply and Demand together at last!

2. SUPPLY and demand TOGETHER
These two laws are directly contrary to each other. If suppliers want high prices, but buyers want low prices, how on earth does anything get traded?
The point where:
quantity supplied = quantity demanded
supply demand

3. Supply and demand Market Equilibrium (aka market clearing price)
EOC study guide
Supply & Demand #4
Market Equilibrium (aka market clearing price)
The point at which sellers are willing to sell as much as buyers are willing to buy
Qd=Qs

4. Moving Toward Equilibrium
EOC study guide
Supply & Demand #7
Surplus is the condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above equilibrium.
Shortage is the condition in which the quantity demanded of a good is greater than the quantity supplied. Shortage occur only at prices below equilibrium price.

5. Supply and Demand Interactions
Relationship of quantity supplied Market (Qs) to quantity demanded (Qd) Condition Qs  Qd Surplus Qd  Qs Shortage Qd = Qs Equilibrium

6. Supply and demand Equilibrium or market clearing price
How difficult is it to find this point?
It is the single most difficult aspect of business
All trial and error
“In the Chips” Activity
You will need a piece of paper and a pencil

7. Surplus (a.k.a. excess supply):
Surplus (a.k.a. excess supply):
when quantity supplied is greater than quantity demanded P Q
Example: If P = $5, S D
Surplus
then QD = 9 lattes
and QS = 25 lattes
resulting in a surplus of 16 lattes 7

8. Surplus (a.k.a. excess supply):P Q
Facing a surplus, sellers try to increase sales by cutting price. S D
Surplus
This causes QD to rise
and QS to fall…
…which reduces the surplus. 8

9. Surplus (a.k.a. excess supply):P Q
Facing a surplus, sellers try to increase sales by cutting price. S D
Surplus
This causes QD to rise and QS to fall.
Prices continue to fall until market reaches equilibrium. 9

10. What happens to price when there is a surplus?
Suppliers cannot sell all of their goods
Inventory grows
Expensive to store
What happens to price?
It lowers to the equilibrium price

11. Shortage (a.k.a. excess demand):
Shortage (a.k.a. excess demand):
when quantity demanded is greater than quantity supplied P Q
Example: If P = $1, S D
then QD = 21 lattes
and QS = 5 lattes
resulting in a shortage of 16 lattes
Shortage 11

12. Shortage (a.k.a. excess demand):P Q
Facing a shortage, sellers raise the price, S D
causing QD to fall
and QS to rise,
…which reduces the shortage.
Shortage 12

13. Shortage (a.k.a. excess demand):P Q
Facing a shortage, sellers raise the price, S D
causing QD to fall
and QS to rise.
Prices continue to rise until market reaches equilibrium.
Shortage 13

14. What happens to price when there is a shortage?
Price is below equilibrium causing a high demand for the good and a low supply
Buyers will pay higher prices for goods
Higher prices motivate suppliers to produce more
Price will rise until it reaches equilibrium