Econ 101: Microeconomics Chapter 3: Supply and Demand Part 2 Equilibrium: Putting Supply and Demand Together When a market is in equilibrium • Both price of good and.
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Transcript Econ 101: Microeconomics Chapter 3: Supply and Demand Part 2 Equilibrium: Putting Supply and Demand Together When a market is in equilibrium • Both price of good and.
Econ 101:
Microeconomics
Chapter 3:
Supply and Demand
Part 2
Equilibrium: Putting Supply and
Demand Together
When a market is in equilibrium
•
Both price of good and quantity bought and sold have
settled into a state of rest
Equilibrium price, p*, is a “Market clearing” price:
•
Price at which quantity supplied ________________
quantity demanded. This quantity is called the Equilibrium
quantity, Q*.
The equilibrium price and equilibrium quantity
can be found on the _________ and _________
axes, respectively
• At point where supply and demand curves cross
Market Equilibrium
Supply
Price
Equilibrium
E
P*
Demand
Q*
Equilibrium price (p*) : the price that “balances” quantity supplied
and quantity demanded.
Quantity
Excess Demand
S
Price
E
p*
J
H
p1
Excess Demand
Q1
Q*
Q2
D
Quantity
Suppose price starts out below the equilibrium level:
Disappointed demanders will bid up the price, driving price
up toward equilibrium.
Excess Demand
Excess demand
• At a given price, the excess of quantity
demanded over quantity supplied
Price of the good will rise as buyers
compete with each other to get more of
the good than is available
Excess Supply
S
Price
Excess Supply
p1
L
K
E
p*
D
Q1
Q*
Q2
Quantity
Suppose price starts out above the equilibrium level:
Disappointed supplier will undercut rivals’ prices, driving
price down toward equilibrium.
Excess Supply
Excess Supply
• At a given price, the excess of quantity
supplied over quantity demanded
Price of the good will fall as sellers
compete with each other to sell more of
the good than buyers want
Income Rises: What Happens
When Things Change
Income rises, causing ___________ in
demand
• __________ shift in the demand curve causes
•
_________ movement along the supply curve
Equilibrium price and equilibrium quantity both
_________
Shift of one curve causes a movement
along the other curve to new equilibrium
point
Increase in Income
Price per
Bottle
4. Equilibrium
price
increases
3. to a new
equilibrium.
S
$4.00
3.00
2. moves us along
the supply
curve . . .
F'
E
1. An increase in
demand . . .
D2
D1
5. and equilibrium quantity
increases too.
50,000 60,000
Number of Bottles of
Maple Syrup per Period
An Ice Storm Hits: What Happens When
Things Change
An ice storm causes _________ in
_______
• Weather is
_________ variable for _______
curve
• Any change that shifts the supply curve leftward in
a market will increase the equilibrium price
• And decrease the equilibrium quantity in that market
A Shift of Supply and A New Equilibrium
Price per
Bottle
$5.00
3.00
S2
S1
E'
E
D
35,000 50,000
Number of Bottles
Changes in the Market for Handheld PCs
Price per
Handheld
PC
3. moved the market to
a new equilibrium.
2. and a decrease
in demand . . .
4. Price
decreased . . .
A
$500
B
S2002
S2003
1. An increase in
supply . . .
$400
D2002
5. and quantity
decreased as well.
D2003
2.45 3.33
Millions of Handheld PCs
per Quarter
Both Curves Shift
When just one curve shifts (and we know the
direction of the shift) we can determine the
direction ___________________________
____________________
When both curves shift (and we know the
direction of the shifts) we can determine the
direction ____________________________
______________________
•
Direction of the other will depend on which curve shifts
by more
The Three Step Process
Key Step 1—Characterize the Market
•
Decide which market or markets best suit problem being
analyzed and identify decision makers (buyers and sellers)
who interact there
Key Step 2—Find the Equilibrium
•
Describe conditions necessary for equilibrium in the market,
and a method for determining that equilibrium
Key Step 3—What Happens When Things Change
•
Explore how events or government polices change market
equilibrium
Using Supply and Demand:
The Invasion of Kuwait
Why did Iraq’s invasion of Kuwait cause
the price of oil to rise?
• Immediately after the invasion, United States
•
led a worldwide embargo on oil from both Iraq
and Kuwait
A significant decrease in the oil industry’s
productive capacity caused a shift in the
supply curve to the left
• Price of oil increased
The Market For Oil
Price per
Barrel of Oil
S2
S1
E'
P2
E
P1
D
Q2
Q1
Barrels of Oil
Using Supply and Demand:
The Invasion of Kuwait
Why did the price of natural gas rise as
well?
• Oil is a substitute for natural gas
• Rise in the price of a substitute increases
•
demand for a good
Rise in price of oil caused demand curve for
natural gas to shift to the right
• Thus, the price of natural gas rose
The Market For Natural Gas
Price per Cubic
Foot of Natural
Gas
S
F'
P4
F
D2
P3
D1
Q3
Q4
Cubic Feet of
Natural Gas