What is the equilibrium price? What is the equilibrium quantity? Module 7 Notes

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1 Module 7 Supply & Demand Equilibrium Differences between Supply & Demand: Competition functions differently in supply and demand. Competition among consumers for scarce products leads to higher prices an auction where several buyers push the price up. Competition among producers and sellers leads to more choices, improved quality, and lower prices to draw consumers in. Price changes impact buyers and sellers. Rising oil prices provide an incentive for consumers to drive less or buy more efficient cars, but they also provide an incentive to producers to find more oil. Sep 24 12:56 PM Sep 24 1:08 PM What is the equilibrium price? What is the equilibrium quantity? Combining supply and demand allows economists to predict the price and actual quantity (both axis). In a competitive market, the point where supply and demand meet is the equilibrium. Sep 30 12:07 PM Oct 1 9:55 PM If the quantity of a good demanded equals the quantity of the good supplied, then that good has reached equilibrium. In an equilibrium, no individual would be better off doing something different. The equilibrium point has a corresponding equilibrium price (also known as market clearing price) and equilibrium quantity. Why does the equilibrium price clear the market? Every buyer willing to pay that price will find a seller willing to sell at that price, so there are no unsold goods. Equilibrium Price Equilibrium Quantity Oct 1 9:55 PM 1

2 Assumption for finding Equilibrium: Figure 6 6 Market Price assumes the market is wellestablished and ongoing buyers and sellers have clear expectations about what price the good is going for. Oct 2 9:20 AM Oct 1 4:49 PM If the price is higher than consumers want to pay, there will be a surplus of the good. The surplus is also known as the excess supply Surplus is calculated by subtracting the quantity demanded at that price from the quantity supplied at that price. In a surplus, producers can t find buyers for their excess goods. They lower prices to entice buyers, which eventually lowers the price until the good reaches equilibrium. Surplus = Qs Qd Pencils Oct 1 10:04 PM 2

3 Module 7 Notes If the price is lower than equilibrium, there is more demand for the good than supply. That creates a shortage. The shortage is also known as excess demand. The shortage is calculated by subtracting the quantity supplied at that price from the quantity demanded at that price. Consumers who want to buy the good become frustrated. Consumers could offer producers more than the market price or producers could raise their prices to meet the demand. Raising the prices eventually drives the price back up to equilibrium. Shortage = Qd Qs Oct 2 9:30 AM Oct 2 9:30 AM Soda Oct 1 9:46 PM Sep 26 8:12 AM Tea is a for coffee. If the price of tea rises, what would happen to the demand for coffee? Changes in Supply and/or Demand Change Equilibrium Oct 2 9:30 AM Oct 1 9:46 PM 3

4 Example where demand for a good decreases Oct 1 9:46 PM Oct 2 11:25 AM Good: Tickets to a concert for a popular musician or band. As the band has more success, and gets more popular with fans, what happens to the price of a concert ticket? Why? Good: New cars During a recession, people buy fewer new cars. What happens to the price of a new car or truck? Economic Principles about how the Market responds to demand: Quality growing land is a(n) for coffee. If quality growing land became more expensive, what would happen to the supply for coffee? If demand increases, equilibrium price and equilibrium quantity increase. If demand decreases, equilibrium price and equilibrium quantity decrease. Oct 2 11:34 AM Oct 1 9:50 PM 4

5 Example where supply for a good increases Oct 1 9:50 PM Oct 2 11:25 AM Good: Jeans Cotton is an important raw material in the making of clothes like denim jeans. If the global price of cotton rises, what happens to the price of jeans? Good: Corn Production technology has greatly improved in agriculture, producing more corn on the same amount of land. How has the better technology affected the price of corn? Economic Principles about how the Market responds to supply: If supply increases, equilibrium price falls and equilibrium quantity rises. If supply decreases, equilibrium price rises and equilibrium quantity falls. Shifts to Both Supply & Demand If both supply and demand shift, the AMOUNT they each shift impacts the market differently. Oct 2 11:34 AM Oct 1 9:51 PM 5

6 Shifts in Opposite Directions In general, when supply and demand shift in OPPOSITE directions, we know price for sure, but not quantity. Whichever curve has the biggest shift will have the biggest effect. Shifts in the Same Direction In general, when supply and demand shift in the SAME direction, the change in quantity can be predicted, but the change in price cannot. Example: A decrease in the demand for rap music coupled with an increase in rap artists would have the effect of reducing the market price but would have an indeterminate effect on the quantity of rap music produced. Example: a decrease in the demand for disco music combined with a decrease in disco artists would result in a definite decrease in the quantity of disco produced, but would have an indeterminate effect on the price of the music. Oct 2 11:56 AM Oct 2 12:01 PM The recent Winter Olympics has increased the popularity of snowboarding and more companies have begun producing snowboards. How will these events affect the market for snowboards? How the price changes depends on which of the two shifts is stronger... Oct 7 8:53 AM 6