# Demand, Supply, and Price

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4 Equilibrium When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. As you can see in Figure Three, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. Figure Three Equilibrium Disequilibrium Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. Excess Supply (Surplus) Excess supply or surplus is the condition that exists when quantity supplied exceeds quantity demanded at the current price. If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. Excess Demand (Shortage) Excess demand or shortage is the condition that exists when quantity demanded exceeds quantity supplied at the current price. Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. Figure Four Excess Supply In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium. Shifts versus Movement Figure Five Excess Demand For economics, the movements and shifts in relation to the supply and demand curves represent very different market phenomena.

5 Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa. Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa. Figure Six Movement along the Demand Curve Figure Seven Movement along the Supply Curve Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of pop was \$2 and the quantity of pop demanded increased from Q1 to Q2, then there would be a shift in the demand for pop. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, pop suddenly became the only type of soda available for consumption. Conversely, if the price for a bottle of pop was \$2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of pop. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is affected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of sugarcane; pop manufacturers would be forced to supply less pop for the same price. Figure Eight Shift in Demand for Pop Figure Nine Shift in Supply for Pop

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