1. Copyright © Pearson Education, Inc.Slide 1 Chapter 6, Section 2 Essential Question Ch 6: What is the right price? Section 2: How do changes in S&D affect equilibrium

2. Copyright © Pearson Education, Inc.Slide 2 Chapter 6, Section 2 Objectives 1.Explain why a free market naturally tends to move toward equilibrium. 2.Analyze how a market reacts to an increase or decrease in supply. 3.Analyze how a market reacts to an increase or decrease in demand.

3. Copyright © Pearson Education, Inc.Slide 3 Chapter 6, Section 2 Discussion: Technology and Changing Markets How did the invention of digital cameras affect the demand for 35mm film cameras? –Demand for digital increase; Demand for film decrease As digital camera technology improved, what happened to the supply of digital cameras? Why? –Supply increased to match increased demand. –Technology led to improvements and lowered costs. This increased supply –You can get a 7.1MP camera now for the same cost as a 3MP camera a few years ago –Supply shifts to the right

4. Copyright © Pearson Education, Inc.Slide 4 Chapter 6, Section 2 Discussion: Technology and Changing Markets What has happened to the price or quality of digital cameras over time? –Get a better camera now for the same amount of money –Price for the same camera has fallen over time

5. Copyright © Pearson Education, Inc.Slide 5 Chapter 6, Section 2 Discussion: Technology and Changing Markets Kodak suffered from the invention of digital cameras. Picasa/Shutterfly and other online picture services have boomed What other products might have been affected by the advancement in camera technology? Digital Cameras

6. Copyright © Pearson Education, Inc.Slide 6 Chapter 6, Section 2 Discussion: Technology and Changing Markets In groups of 3-4 people, take 6 minutes to discuss the following: –Pick a pair of products you suggested in the Bell Ringer or two products from the diagram on the previous slide –Discuss in your group how the supply and demand curves for each product have changed over time ie. Supply and demand of digital cameras increased; supply and demand of film cameras decreased –What happened to the price and why? –What related fields/products/services have been affected by the changing technology? Select a group member to share out to the class.

7. Copyright © Pearson Education, Inc.Slide 7 Chapter 6, Section 2 Introduction How do changes in supply and demand affect equilibrium? 1.Changes in supply and demand cause shifts in the curve(s) 2.Shift in a curve causes prices to go up and down, which causes disequilibrium 3.In a free market, price and quantity will tend to move toward equilibrium whenever they find themselves in disequilibrium this is often a new equilibrium price and output

8. Copyright © Pearson Education, Inc.Slide 8 Chapter 6, Section 2 Equilibrium: a “Moving Target” Equilibrium for most products is in constant motion. –Buyers/sellers are always adjusting the price and quantity they agree upon –Think of bargaining in a marketplace Think of equilibrium as a “moving target” that changes as market conditions change. –As supply or demand increases or decreases, a new equilibrium is created for that product.

9. Copyright © Pearson Education, Inc.Slide 9 Chapter 6, Section 2 The Pull Back to Equilibrium When a market is in disequilibrium, there are either shortages or surpluses The market will eventually move back toward equilibrium. –Shortages cause a firm to raise its prices. Higher prices cause the quantity supplied to rise and the quantity demanded to fall until the two values are equal again. –Surpluses cause a firm to drop its prices. Lower prices cause the quantity supplied to fall and the quantity demanded to rise until equilibrium is restored.

10. Copyright © Pearson Education, Inc.Slide 10 Chapter 6, Section 2 Changes in Supply and New Equilibrium A shift in the supply curve will change the equilibrium price and quantity. As supply increases, the market moves toward a new equilibrium –Price lower, Quantity higher than original equilibrium As supply decreases, the market moves toward a new equilibrium –Price higher, Quantity lower than original equilibrium

11. Copyright © Pearson Education, Inc.Slide 11 Chapter 6, Section 2 Changes in Supply and New Equilibrium Factors that change supply An example of a product that saw a radical market change in recent years is the digital camera. FactorEffect on SupplyShift L/R Rising CostsDecrease SupplyShift Left Falling CostsIncrease SupplyShift Right Technology/InnovationIncrease SupplyShift Right SubsidyIncrease SupplyShift Right TaxDecrease SupplyShift Left RegulationDecrease SupplyShift Left More SuppliersIncrease SupplyShift Right

12. Copyright © Pearson Education, Inc.Slide 12 Chapter 6, Section 2 Changes in Supply and New Equilibrium

13. Copyright © Pearson Education, Inc.Slide 13 Chapter 6, Section 2 Checkpoint: What happens to the equilibrium price when the supply curve shifts to the right? a)Original equilibrium: P*=$900 and Q*=2mm b)An increase in supply shifts the supply curve to the right. Disequilibrium from surplus: Qd=2mm, Qs=4mm; 2mm surplus c) Firms drop prices to reduce surplus. New equilibrium: P 2 =$450 and Q 2 =3mm Market for Digital Cameras Changes in Supply and New Equilibrium Price changes in response to change in supply

14. Copyright © Pearson Education, Inc.Slide 14 Chapter 6, Section 2 A shift in the demand curve will change the equilibrium price and quantity. As demand increases, the market moves toward a new equilibrium –Price higher, Quantity higher than original equilibrium As demand decreases, the market moves toward a new equilibrium –Price lower, Quantity lower than original equilibrium Changes in Demand and New Equilibrium

15. Copyright © Pearson Education, Inc.Slide 15 Chapter 6, Section 2 Factors that change demand FactorEffect on DemandShift L/R Rising IncomeIncrease DemandShift Right Rising PopulationIncrease DemandShift Right Changing Demographics Depends Advertising/MarketingIncrease DemandShift Right Rising Demand for Complements Increase DemandShift Right Rising Demand for Substitutes Decrease DemandShift Left Changes in Demand and New Equilibrium

16. Copyright © Pearson Education, Inc.Slide 16 Chapter 6, Section 2 Changes in Demand and New Equilibrium Checkpoint: What happens to the equilibrium price when the demand curve shifts to the right? a)Original equilibrium: P*=$25 and Q*=300k b)An increase in demand shifts the demand curve to the right. Disequilibrium from shortage: Qd=500k, Qs=300k; 200k surplus c)Firms raise prices to reduce shortage. New equilibrium: P 2 =$30 and Q 2 =400k Demand for New Era 59/50 Hats

17. Copyright © Pearson Education, Inc.Slide 17 Chapter 6, Section 2 Fads and Shortages Fads often lead to an increase in demand for a particular good. As a result of fads, shortages appear to customers in different forms: –Empty shelves at the stores –Long lines to buy a product in short supply –Rising search costs, such as driving to multiple stores to find a product.

18. Copyright © Pearson Education, Inc.Slide 18 Chapter 6, Section 2 Putting it All Together: Changes in Supply/Demand Change (ceteris paribus) Disequilibrium Effect New Equilibrium Supply IncreasesSurplus (Qs>Qd) Price Falls, Quantity Rises Supply DecreasesShortage (Qs<Qd) Price Rises, Quantity Falls Demand IncreasesShortage (Qs<Qd) Price Rises, Quantity Rises Demand Decreases Surplus (Qs>Qd) Price Falls, Quantity Falls

19. Copyright © Pearson Education, Inc.Slide 19 Chapter 6, Section 2 Key Terms inventory: the quantity of goods that a firm has on hand (this gets bigger when there is a surplus and smaller when there is a shortage) fad: a product that is popular for a short period of time search costs: the financial and opportunity costs that consumers pay when searching for a good or service (increased from a shortage). Internet has decreased search costs.