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Changes in Market Equilibrium Lecture Notes Objectives: Students will identify the determinants that create changes in price Students will explain how a market reacts to a fall in supply by moving to a new equilibrium Students will explain how a market reacts to shifts in demand by moving to a new equilibrium Changes in Price Factors that affect changes in price o Advances in technology o Changes in tastes and preferences of consumers o Changes in prices of raw materials and labor o New government taxes and subsidies Understanding a shift in supply o Intersection of original supply and demand is equilibrium where the supply and demand is equal o When the supply curve shifts, the equilibrium changes. Point C is the new equilibrium o Point B represents disequilibrium which can result in Excess supply (surplus) Excess demand (shortage) o Finding a new equilibrium Market will adjust itself to find a new equilibrium Quantity demanded greater than quantity supplied – price will go up Quantity demanded less than quantity supplied – price will go down 1 A fall in supply – supply curve shifts to the left o Suppliers raise their prices o Quantity demanded falls o Results in a new equilibrium point that is above and to the left of original equilibrium point along the demand curve Shifts in demand-increase o Problem of excess demand – shortage o Return to equilibrium Prices rise Shift in demand – decrease o Prices decrease 2