Download Surplus

Part II
Surplus (a.k.a. excess supply):
when quantity supplied is greater than
quantity demanded
P
Example:
S
D Surplus
$6.00
If P = $5,
$5.00
then
QD = 9 lattes
$4.00
and
QS = 25 lattes
$3.00
$2.00
resulting in a
surplus of 16 lattes
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Surplus (a.k.a. excess supply):
P
$6.00
D
$5.00
$4.00
Surplus
S
Facing a surplus,
sellers try to increase
sales by cutting price.
This causes
QD to rise and QS to fall…
$3.00
…which reduces the
surplus.
$2.00
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Surplus (a.k.a. excess supply):
P
$6.00
D
$5.00
$4.00
Surplus
S
Facing a surplus,
sellers try to increase
sales by cutting price.
This causes
QD to rise and QS to fall.
$3.00
Prices continue to fall
until market reaches
equilibrium.
$2.00
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
What happens to price when there is a surplus?
• Surplus
• Suppliers cannot sell all of their goods
• Inventory grows
• Expensive to store
• What happens to price?
• It lowers to the equilibrium price
Shortage (a.k.a. excess demand):
P
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
when quantity demanded is greater than
quantity supplied
Example:
S
D
If P = $1,
then
QD = 21 lattes
and
QS = 5 lattes
resulting in a
shortage of 16 lattes
$0.00
Shortage
0
5
10 15 20 25 30 35
Q
Shortage (a.k.a. excess demand):
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise,
…which reduces the
shortage.
$4.00
$3.00
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
Shortage (a.k.a. excess demand):
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise.
$4.00
$3.00
Prices continue to rise
until market reaches
equilibrium.
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
What happens to price when there is a shortage?
• Shortage
• Price is below equilibrium causing a high demand for the good and a low
supply
• Buyers will pay higher prices for goods
• Higher prices motivate suppliers to produce more
• Price will rise until it reaches equilibrium
• How do shortages and surpluses effect equilibrium price and
quantity?
• You will need to be able to analyze a shift and explain whether Ep and
Eq increased or decreased
• See examples on the next few slides
Supply: Increase
Demand: No Change
Supply: No Change
Demand: Decrease
S1
S2
D2 D1
Ep
Ep
Eq
Eq
Example of a Double Shift
Supply: Decrease
Demand: Increase
S2
S1
E2
E1
Ep
D2
D1
Eq Indeterminate