Download Economic Survey

Economic Survey
Mr. Rubin de Celis
Chapter 6.2 – Changes in Market Equilibrium
Key Terms
surplus
shortage
search costs
D
P
Excess Demand
S
Q
Firms raise prices
Firms raise Quantity
p
Excess Supply
D
Firms cut prices
Price
Quantity Demanded
D
Quantity Demanded
Q
Quantity Supply
Excess Supply
Excess Demand
Quantity
All changes are along the demand or supply curve.
Assume that the market is at equilibrium, there are two factors that can put it into
disequilibrium, a shift in the entire demand curve and a shift in the entire supply curve.
Shifts in Supply


factors affecting supply shift

technology

government taxes and subsidies

change in price of raw materials

changes in labor used to produce the good
market equilibrium occurs at the intersection of the demand and supply curve

a shift in the entire supply curve will change price and quantity

a shift either to the left or right will create new equilibrium

a change in supply will lead the market to find the new equilibrium and quantity sold
Understanding the shift in Supply

compact disc players introduced

a single CD player cost $1,000

better technology were introduced to produce CD players cheaply

prices fell – 1987

a single disk player went for $300

1992 – disk player price $200

today, disk players are $100 or less

machines are more sophisticated

technology has lowered the cost of production

computer chips

advances allow firms to produce players at lower cost

lower costs were passed on to the consumer
price of a single
disk player$1000
price of a single
disk player $1000
$800
$800
$600
$600
$400
$400
$200
$200
1982
1987
1992
1997
Today
1982
5
10
1987
1992
today
15
20
25
30
Finding a New Equilibrium

CD's went from a luxury good to a mid- priced good.

Technology has shifted the supply curve to the right
disk player
$1000
2 million player unsold- surplus
$800D1
S1
$600
A
S2
B
$400
C
a shift from A to B caused by decrease in cost
Quantity Demanded has not changed
2 million unsold compact disk players
economists call this a surplus
$200
1
2
3
4
5
6
output in millions

Producer response will be to lower prices from $600 to $400

more consumers buy CD players

new equilibrium is found at point C

lower equilibrium price and a higher equilibrium quantity sold

1 million players sold at new equilibrium price
Changing Equilibrium

equilibrium point is always is in motion

the market will drive the supply curve to increase or decrease

equilibrium is a moving target

manufactures and retailers are always searching for a new equilibrium

technology and methods of production change shifting supply curve to increase or decrease

consumers realize this searching by the continuous price changes

sales

rebates

sale techniques help move the surplus of goods from the store shelf onto your own
A Fall in Supply

other factors shifting curve to the left

price of cars affected by cost of raw materials and labor

steel

United Auto Worker Union agree to higher wages and benefits

government imposes new emission regulations

shift of supply curve at all price level

if supply curve shifts to left, quantity sold will also change

as supply shifts to the left, suppliers raise their prices and quantity demanded falls

the new equilibrium point along the demand curve above and to the left of the original
equilibrium point

the market price is higher

quantity sold is lower
Shift of Demand

Around November of each year a new or better product emerges

lines are formed to buy the new gamers dream

trendy products will cause a dramatic shift in demand to the right

Apple Computer comes up with a new palm pilot

General Motors comes up with a new Hybrid car that will travel 350 miles on a gallon of fuel

The problem of excess demand

a sudden shift in the demand curve to the right will lead to excess demand

where quantity demand equilibrium was at 300 thousand, the new quantity demanded is now
500 thousand at $24

increase of 200 thousand in quantity demanded

excess demand appears as bare shelves

driving to find the product, calling different stores – search costs

Cabbage Patch dolls in 1986


Search costs – financial and opportunity costs consumers pay in searching for a good or
service
available dolls must be rationed or distributed in some way

limiting number of items purchased

“first come first serve”
Return to equilibrium


firms will react to the signs of excess demand and raise prices

consumers might even push prices up by demand

housing market in the 1980's through 2006

antiques
customer might bid up the price by offering more in competition against other customers

customers bid up the price to the new equilibrium price of $30 - letter C

when demand increases, both the equilibrium price and equilibrium quantity also increase

the market forces are at work pushing the price up to the new equilibrium price
Price
$60
Supply
$50
$40
C
$30
A
B
$20
$10
New Demand
Original Demand
100
200
300
400
500
600
700
800
Output in Thousands
Fall in Demand

When a fad passes its peak, demand can quickly fall

excess demand turns into excess supply

when demand falls, the demand curve shifts to the left

at the end of the fad restores the original price and quantity supplied
Chapter 6.2 assessment
1. what conditions lead to a surplus?
2. what is an example of a search cost?
3. Explain how the equilibrium price and quantity sold of eggs will change in the following cases.
Remember that they need not move in the same direction.
S2 S1
a. An outbreak of food poisoning is traced to eggs.
.
b. Scientists breed a new chicken that lays twice as many eggs each week
S1
S2
c. A popular talk show host convinces her viewer to eat an egg a day.
S1 S2
4. What will happen to suppliers in a market if there is a surplus of the good they sell, but no
supplier can afford to lower prices? Hint: inelastic v elastic market
5. The graph at the right shows the effects of a demand shift on a particular market.
a. Has demand increased or decreased? Explain.
b. What are the original equilibrium price and quantity sold?
c. What are the new equilibrium price and quantity sold?
d.
A new tax raises the cost of production. How does the supply curve react?
e.
Give a market price and quantity sold that might be a new equilibrium point after this cost
increase.
Equilibrium price could go up to $27; supply 175
Price
S2
S1
1.
.
$25
$20
New Demand
150
Original Demand
180