Download 1 Macroeconomics

UNIT
1 Macroeconomics
LESSON 4
Equilibrium Price and Quantity
Introduction and Description
Time Required
In this lesson we bring the two sides of the market
— demand and supply — together to determine
the equilibrium price and quantity. The students
should understand that unless there are forces
operating to change supply or demand, the price
and quantity will remain at the equilibrium.
One class period or 45 minutes
Activity 7 brings the supply and demand sides of
the market together and helps the students understand equilibrium price and quantity. The factors that
shift supply and demand are also used to emphasize
the impact of supply or demand on the equilibrium
price and quantity. The second part of Activity 7 has
the students work through changes in supply and
demand and the effects in related markets.
Objectives
1. Define equilibrium price and equilibrium
quantity.
2. Determine the equilibrium price and quantity
when given the demand for and supply of a
good or commodity.
3. Explain why, at prices above or below the equilibrium price, market forces operate to move the
price back toward equilibrium price.
4. Predict the equilibrium price and quantity if
there are changes in demand or supply.
5. Given a change in supply or demand, explain
which curve shifted and why.
6. Explain how markets act as rationing devices.
Materials
1. Activity 7
2. Visual 1.9
Procedure
1. Begin with a discussion of equilibrium. Review
the importance of the market as a price determination mechanism.
2. Use Visual 1.9 to explain market equilibrium.
(A) What happens if the price is $10? The quantity supplied is 100, and the quantity demanded is 60. Therefore, there is excess
supply.
(B) What happens if the price is $6? The quantity demanded is 100, and the quantity supplied is 60. Therefore, there is excess demand.
(C) What happens if the price is $8? The quantity that producers want to sell is exactly
equal to the quantity that buyers want to
buy. The market is in equilibrium.
3. Have the students start Activity 7 in class and
complete it for homework.
4. Review with the students the answers to Activity 7.
Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.
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UNIT
1 Macroeconomics
LESSON 4 ■ ACTIVITY 7
Answer
Key
Equilibrium Price and Equilibrium Quantity
Part A
Figure 7.1 below shows the demand for Greebes and the supply of Greebes. Plot these data on the
axes in Figure 7.2. Label the demand curve D and label the supply curve S. Then answer the questions
that follow. Fill in the answer blanks, or underline the correct answers in parentheses.
Figure 7.1
Demand for and Supply of Greebes
Price
($ per Greebe)
$.15
.20
.25
.30
.35
Quantity Demanded
(millions of Greebes)
300
250
200
150
100
Quantity Supplied
(millions of Greebes)
100
150
200
250
300
Figure 7.2
PRICE PER GREEBE
Demand for and Supply of Greebes
.55
.50
.45
.40
.35
.30
.25
.20
.15
.10
.05
0
S1
E1
S
E
E2
D1
50
D
100 150 200 250 300 350
QUANTITY (millions of Greebes)
400
1. Under these conditions, competitive market forces would tend to establish an equilibrium price of
per Greebe and an equilibrium quantity of
200
million Greebes.
$ 0.25
2. If the price currently prevailing in the market is $0.30 per Greebe, buyers would want to buy
150 million Greebes and sellers would want to sell
250
million Greebes. Under these
conditions, there would be a (shortage / surplus) of 100 million Greebes. Competitive market
forces would tend to cause the price to (increase / decrease) to a price of $0.25 per Greebe.
At this new price, buyers would now want to buy 200
million Greebes, and sellers now want
million Greebes. Because of this change in (price / underlying conditions),
to sell 200
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Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.
UNIT
1 Macroeconomics
the (demand / quantity demanded) changed by
50
(supply / quantity supplied) changed by
LESSON 4 ■ ACTIVITY 7
Answer
Key
50
million Greebes, and the
million Greebes.
3. If the price currently prevailing in the market is $0.20 per Greebe, buyers would want to buy
250 million Greebes, and sellers would want to sell
150
million Greebes. Under these
conditions, there would be a (shortage / surplus) of 100 million Greebes. Competitive market
forces would tend to cause the price to (increase / decrease) to a price of $0.25 per Greebe.
At this new price, buyers would now want to buy
200 million Greebes, and sellers now
want to sell 200 million Greebes. Because of this change in (price / underlying conditions),
the (demand / quantity demanded) changed by 50 million Greebes, and the
50
million Greebes.
(supply / quantity supplied) changed by
4. Now, suppose a mysterious blight causes the supply schedule for Greebes to change to the
following:
Figure 7.3
New Supply of Greebes
Price
($ per Greebe)
$.20
.25
.30
.35
Quantity Supplied
(millions of Greebes)
50
100
150
200
Plot the new supply schedule on the axes in Figure 7.2 and label it S1. Label the new equilibrium
E1. Under these conditions, competitive market forces would tend to establish an equilibrium price of
$0.30
per Greebe and an equilibrium quantity of
150
million Greebes.
Compared with the equilibrium price in Question 1, we say that because of this change in
(price / underlying conditions), the (supply / quantity supplied) changed; and both the equilibrium
price and the equilibrium quantity changed. The equilibrium price (increased / decreased), and the
equilibrium quantity (increased / decreased).
5. Now, with the supply schedule at S1, suppose further that a sharp drop in people’s incomes as the
result of a prolonged recession causes the demand schedule to change to the following:
Figure 7.4
New Demand for Greebes
Price
($ per Greebe)
$.15
.20
.25
.30
Quantity Demanded
(millions of Greebes)
200
150
100
50
Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.
359
UNIT
1 Macroeconomics
LESSON 4 ■ ACTIVITY 7
Answer
Key
Plot the new demand schedule on the axes in Figure 7.2 and label it D1. Label the new equilibrium
E2. Under these conditions, with the supply schedule at S1, competitive market forces would tend to
per Greebe and an equilibrium quantity of
establish an equilibrium price of
$0.25
million Greebes. Compared with the equilibrium price in Question 4, because of this
100
change in (price / underlying conditions), the (demand / quantity demanded) changed. The
equilibrium price (increased / decreased), and the equilibrium quantity (increased / decreased).
6. The movement from the first equilibrium price and quantity to the new equilibrium price and
quantity is the result of a (price / nonprice) effect.
Part B
The following questions refer to a group of related markets in the United States during a given time
period. Assume that the markets are perfectly competitive and that the supply and demand model is
completely applicable. The figures show the supply and demand in each market before the assumed
change occurs. Trace through the effects of the assumed change, other things constant. Work your way
from left to right. Shift only one curve in each market. For each market, draw whatever new supply or
demand curves are needed, labeling each new curve S1 or D1. Then circle the correct symbol under
each diagram (↑ for increase, — for unchanged, and ↓ for decrease). Remember to shift only one
curve in each market.
7. Assume that a new fertilizer dramatically increases the amount of wheat that can be harvested
with no additional labor or machinery. Also assume that this fertilizer does not affect potato farming and that people are satisfied to eat either bread made from wheat flour or potatoes.
Figure 7.5
D
S
S1
D
S
D1
PRICE
S1
PRICE
S
PRICE
PRICE
Effects of a New Fertilizer
D
S
D1
D
QUANTITY
QUANTITY
QUANTITY
QUANTITY
Wheat
Bread
Potatoes
Wheat Harvesting
Machinery
Demand:
Supply:
Equilibrium
price:
Equilibrium
quantity:
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UNIT
1 Macroeconomics
Answer
Key
LESSON 4 ■ ACTIVITY 7
8. Assume that a heavy frost destroys half the world’s coffee crop and that people use more cream in
coffee than they do in tea.
Figure 7.6
Effects of a Loss of Coffee Crop
D1
D
D
S
PRICE
S
PRICE
PRICE
S
PRICE
S1
S
D1 D
D1 D
QUANTITY
QUANTITY
QUANTITY
QUANTITY
Coffee
Tea
Cream
Automatic Coffee
Makers
Demand:
Supply:
Equilibrium
price:
Equilibrium
quantity:
Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.
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UNIT
1 Macroeconomics
LESSON 4 ■ ACTIVITY 7
Answer
Key
9. Assume beef and pork are perfect substitutes. The price of pork rises dramatically. Catsup is a
complement to beef; mustard is a complement to pork.
Figure 7.7
D1
D
PRICE
PRICE
D1
D
PRICE
S
S
S
D1
D
PRICE
Effects of a Change in the Price of Pork
S
D1 D
QUANTITY
QUANTITY
QUANTITY
QUANTITY
Beef
Feed for Cattle
Catsup
Mustard
Demand:
Supply:
Equilibrium
price:
Equilibrium
quantity:
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Advanced Placement Economics Teacher Resource Manual © National Council on Economic Education, New York, N.Y.