1. Increases and Decreases in Supply and Demand
Mr. Raposo
Thursday, September 27, 2006

2. Agenda Market Equilibrium Increase/decrease in supply
Increase/decrease in demand
Continue exercise on supply and demand

3. Market Equilibrium
The stable point at which demand and supply curves intersect
Quantity Supplied = Quantity Demanded
Whenever the market is out of equilibrium, supply can’t keep up with demand or demand can’t keep up with supply

4. Market Equilibrium P$ S D
Price Q
Quantity

5. Effect of an Increase in DemandP1
Price Level P Q Q1
Real Output

6. An Increase in the Demand for DVD Players
An increase in the demand for DVD players causes the demand curve to shift to the right. The shift from D1 to D2 causes a temporary shortage (of 100 DVD’s). As a result, price rises until a new equilibrium point of supply and demand is reached. The new equilibrium price is $5 and 300 DVD players.
Price has increased by $1 and quantity has fallen by 50 DVD players .

7. An Increase in the Demand for DVD Players5
(Hundreds of dollars) D2
Shortage of 100
300
(thousands)

8. Effect of a Decrease in Demand
Price Level P P0 Q0 Q
Real Output

9. A Decrease in the Demand for DVD Players
Surplus of 100
(Hundreds of dollars) 3 D0
200
(thousands)

10. A decrease in the Demand for DVD Players
A decrease in the demand for DVD players causes the demand curve to shift to the left. The shift from D1 to D0 causes a temporary surplus (of 100 DVD’s). As a result, price falls until a new equilibrium point of supply and demand is reached. The new equilibrium price is $3 and 200 DVD players.
Price has decreased by $1 and quantity has fallen by 50 DVD players .

11. An Increase in the Supply of DVD Players
Surplus of 100 S2
(Hundreds of dollars) 3
300
(thousands)

12. An Increase in the Supply of DVD Players
An increase in the supply of DVD players causes the supply curve to shift to the right. The shift from S1 to S2 causes a temporary surplus (of 100 DVD’s). As a result, price falls until a new equilibrium point of supply and demand is reached. The new equilibrium price is $3 and 300 DVD players ( a fall in price by $1 and a rise in quantity by 50 DVD players).

13. A Decrease in the Supply of DVD Players5
(Hundreds of dollars)
Shortage of 100
200
(thousands)

14. A Decrease in the Supply of DVD Players
An decrease in the supply of DVD players causes the supply curve to shift to the left. The shift from S1 to S0 causes a temporary shortage (of 100 DVD’s). As a result, price rises until a new equilibrium point of supply and demand is reached. The new equilibrium price is $5 and 200 DVD players.
Price has increased by $1 and quantity has fallen by 50 DVD players .

15. Summary Ceteris Paribus…….
Increase in supply causes a decrease in price and an increase in quantity
Decrease in supply causes an increase in price and an decrease in quantity
Increase in demand causes an increase in price and an increase in quantity
Decrease in demand causes an decrease in price and an decrease in quantity

16. Price Controls: Price Floors
Refer to separate slideshow

17. Consumer Surplus
Refer to separate show