1. Competitive Markets

2. Market Equilibrium
In competitive markets, demand and supply play a key role in coordinating the decisions of consumers and producers
Market Equilibrium: occurs when the quantity demanded of a good equals the quantity supplied of that good
It is the point at which the demand and supply curves intersect
There is no upward or downward pressure on the price; the market is in balance. In other words, the "market clears".
At this point neither excess supply (surplus) or excess demand (shortage) exists.

3. Surplus: occurs when the quantity supplied exceeds the quantity demanded
Surpluses occur when the price is above its equilibrium level
When a surplus exists, producers have too much inventory building up . They have a glut of unsold goods.
The only way for them to get rid of their inventories is by reducing their price.
Shortage: occurs when the quantity supplied is less than the quantity demanded
Shortage occur when the price is below the equilibrium level
When a shortage exists, consumers "bid up" the prices of goods.

4. Example; Market demand and supply schedules for Strawberries
At the same time, producers/retailers realize that the good they are selling is scarce and in demand. This allows them to raise their prices.
Example; Market demand and supply schedules for Strawberries
Price ($ per kg)
Quantities (millions of kg)
Surplus (+) or Shortage (-) D S
3.00 5 13 +8
2.50 7 11 +4
2.00 9
1.50 -4
1.00 -8

5. When price is $2.00 the quantity demanded equals the quantity supplied
Thus, the equilibrium price is $2 and the equilibrium quantity demanded is 9 million kg

6. Effect of a Change in Demand on Equilibrium
Example; Suppose that the market for Strawberries is in equilibrium
The equilibrium price is $2/kg and quantity demanded is 9 kg
Question: If there is an increase in the price of blueberries, what happens to the demand for Strawberries?
The demand for strawberries will increase
Price ($ per kg)
Quantities (millions of kg) D0 D1 S
3.00 5 9 13
2.50 7 11
2.00
1.50 15
1.00 17

7. The demand curve shifts to the right
Both price and quantity increase along the supply curve.
The new equilibrium price is $2.50 and the new equilibrium quantity is 11 million kg.

8. Effect of a Change in Supply on Equilibrium
Example; Suppose that the market for Strawberries is in equilibrium
The equilibrium price is $2/kg and quantity demanded is 9 kg
Question: If there is an increase in the number of suppliers, what happens to the supply for Strawberries?
The supply of strawberries will increase
Price ($ per kg)
Quantities (millions of kg) D0 S0 S1
3.00 5 13 17
2.50 7 11 15
2.00 9
1.50
1.00

9. The supply curve shifts to the right
The price decreases and quantity increases along the demand curve
The new market price is $1.50 and the new quantity is 11 million kg

10. Changes in Market Equilibrium

11. Market Equilibrium
Competition among buyers and among sellers drive the price toward equilibrium price.
Price regulates buying and selling plans.
Price adjusts when plans don’t match.

12. Changes in Supply and Demand
When both supply and demand change, the effect is a combination of the individual effects.
Case
Change in Supply
Change in Demand
Effect on Equilibrium Price
Effect on Equilibrium Quantity 1
Increase
Decrease
Indeterminate 2 3 4

13. Case#1 Suppose there is an increase in supply and a decrease in demand
The demand curve shifts to the left
The supply curve shifts to the right
The equilibrium price decreases
The equilibrium quantity may increase or decrease

14. Case#2 Suppose there is a decrease in supply and an increase in demand
The supply curve shifts left
The demand curve shifts right
The equilibrium price increases
The equilibrium quantity may increase or decrease

15. Case#3
Suppose there is an increase in supply and an increase in demand
The demand curve shifts to the right
The supply curve shifts to the right
The equilibrium price may increase or decrease
The equilibrium quantity increases

16. Case#4
Suppose there is an decrease in supply and an decrease in demand
The demand curve shifts to the left
The supply curve shifts to the left
The equilibrium price may increase or decrease
The equilibrium quantity decreases