1. Supply, Demand and Equilibrium

2. In competitive markets the interaction of supply and demand tends to move toward what economists call equilibrium ▫Ex: Shopping Lane  When no one else can be better off by doing something different- this is equilibrium

3. Concept of equilibrium helps us understand the price at which a good or service is bought and sold as well as the quantity transacted of the good or service ▫A competitive market is in equilibrium when price has moved to a level at which the quantity of a good demand equals the quantity of that good supplied ▫Price exactly matches the quantity demanded by consumers to the quantity supplied by the suppliers  This is equilibrium price ▫The quantity bought and sold at that price is the equilibrium quantity

4. Equilibrium price is also known as market clearing price- it ensures that every buyer willing to pay that price finds a seller willing to sell at that price and vice versa.

5. Finding Equilibrium Price and Quantity You can use a graph that shows both the supply curve and demand curve ▫The place where they intersect is your equilibrium price  Where Qs=Qd

6. How can we be sure the market will arrive at the equilibrium price? 3 simple questions ▫Why do sellers and purchasers in a market take place at the same time?  In any market where the buyers and sellers have both been around for some time, sales and purchases tend to converge at a generally uniformed price  In a well established ongoing market, all sellers receive and all buyers pay approximately the same price. This is known as market price.

7. ▫Why does the market price fall if it is above the equilibrium price?  Because if it is above, you are seeing a surplus or an excess in supply  Surplus offers an incentive to sellers to offer a lower price. This will push prevailing price down until it reaches the equilibrium price.

8. ▫Why does the market price rise if it is below the equilibrium price?  This is a shortage or an excess in demand  This means that buyers cannot find willing sellers at the current price. In this case buyers will offer more than the prevailing price or sellers will realize they can charge a higher price. This will move the price up to equilibrium.

9. The market price always moves toward the equilibrium price. Where there is neither a shortage nor surplus.

10. Supply and Demand: Changes in Equilibrium What happens when demand curve shifts? Example: Tea and Coffee Tea rises in price- Demand for coffee will increase ▫This increase is a rightward shift ▫Market is no longer in equilibrium: creates a shortage  Qd>Qs  Price of coffee will rise and there will be an increase in quantity supplied- this is an upward movement on supply curve

11. This reflects a general principle: When demand for a good or service increases the equilibrium price and equilibrium quantity of the good or service rise. In the reverse cause: the general principle: When demand for a good or service decreases, the equilibrium price and equilibrium quantity of the good or service falls.

12. What happens when supply curve shifts? Two general principles ▫When supply of a good or service decreases, equilibrium price of good or service rises and the equilibrium quantity falls (leftward shift) ▫When supply of a good or service increases, the equilibrium price of the good or service falls and the equilibrium price of the good or service falls and equilibrium quantity of the good or service rises.

13. Simultaneous Shifts of Supply and Demand Curves Sometimes it happens that an event shifts both the demand and supply curves at the same times. What predictions can we make if they shift in opposite directions? ▫When demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous. ▫When demand decrease and supply increases, the equilibrium price falls but the change in the equilibrium quantity is ambiguous.

14. What predictions can we make if they shift in the same direction? ▫When both demand and supply increase, the equilibrium quantity increases but the change in equilibrium price is ambiguous. ▫When both demand and supply decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous.