Download When Supply Met Demand

When Supply Met Demand
Learning Goals & Success Criteria
By the end of today’s lesson I will…
• be able to explain how the interactions between consumers
and producers in the market determines an equilibrium
price using a model
• be able to distinguish between a shortage and surplus
• be able to determine the new equilibrium price and
quantity when there is a change in demand or supply
recall:
Demand
The quantity of a good or service that buyers are willing and able to
buy at all possible prices during a period of time.
Demand curve – a graph of the
relationship between the price of
a good and the quantity demanded
P
D
Q
recall:
Supply
The amount of a good or service that producers are willing and able
to offer for sale at each possible price during a given period of time.
P
Supply curve – a graph of the
relationship between the price of
a good and the quantity supplied
S
Q
Equilibrium
When Supply Met Demand
Equilibrium
A situation in which the price has reached the level
where quantity supplied equals quantity demanded
P
S
Equilibrium Price (PE)
The price that balances quantity supplied and
quantity demanded
PE
Equilibrium Quantity (QE)
The quantity supplied and quantity demanded at the
equilibrium price
D
QE
Q
Equilibrium
At the equilibrium price, the quantity of the
good buyers are willing to buy exactly
balances the quantity that sellers are willing
to sell.
P
S
The equilibrium is sometimes called the
market clearing price because, at this
price, everyone in the market has been
satisfied: Buyers can buy all they want to buy,
and sellers can sell all they want to sell
PE
D
QE
Q
The actions of buyers and sellers naturally move markets toward the
equilibrium of supply and demand
When Demand Met Supply Activity
So who determines price?
Is it the consumer?
The producer?
Let’s consider what happens when the market price is not equal to the
equilibrium price…
Markets not in Equilibrium
 If the price is set above
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
equilibrium price, at $3.50
per cup of hot chocolate,
the quantity of the good
supplied (10 cups) exceeds
the quantity demanded (4
cups)
Surplus
S
$3.50
$2.75
 There is a surplus!
D
4
Q demanded
7
10
Q supplied
Quantity of
hot chocolate
Surplus
• The situation that results when the quantity supplied of a product exceeds the
quantity demanded. Generally happens because the price of the product is above
the market equilibrium price.
•Suppliers are unable to sell what they want at the going price
•The suppliers’ response to a surplus is to cut their prices which leads to and
increase in quantity demanded and decrease in quantity supplied
•Prices will continue to fall until the market reaches equilibrium
Markets not in Equilibrium
 If the price is set below
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
equilibrium price, at $1.25
per cup of hot chocolate,
the quantity of the good
demanded (10 cups)
exceeds the quantity
supplied (4 cups)
S
$2.75
$1.25
 There is a shortage!
D
Shortage
4
Q supplied
7
10
Q demanded
Quantity of
hot chocolate
Shortage
•The situation that results when the quantity demanded for a product exceeds the
quantity supplied. Generally happens because the price of the product is below the
market equilibrium price.
•Demanders are unable to buy all they want at the going price
•When a shortage occurs in the hot chocolate market, buyers have to wait in long lines
for a chance to buy one of the few cups that are available
•With too many buyers chasing too few goods, sellers respond to the shortage by
raising their prices without losing sales
•As price rises, quantity demanded falls, quantity supplied rises and the market moves
to equilibrium
Law of supply and demand
The claim that the prices of any good adjusts to bring quantity
supplied and the quantity supplied and the quantity demanded for
that good into balance
Analysing changes in equilibrium
What happens to equilibrium price and quantity when there is a
change in supply? When there is a change in demand? Or both?
Increase in Demand
Initial Equilibrium
Price: $2.75
Quantity: 7
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
S
New Equilibrium
Price: $3.00
Quantity: 8
$3.00
When there is an increase in demand:
$2.75
Price
D2
D1
7
8
Quantity of
cups of hot
chocolate
Quantity Demanded
Quantity Supplied
Decrease in Demand
Initial Equilibrium
Price: $2.75
Quantity: 7
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
S
New Equilibrium
Price: $2.50
Quantity: 6
When there is an increase in demand:
$2.75
$2.50
Price
D2
D1
6 7
Quantity of
cups of hot
chocolate
Quantity Demanded
Quantity Supplied
Increase in Supply
Initial Equilibrium
Price: $2.75
Quantity: 7
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
S1
S2
New Equilibrium
Price: $2.50
Quantity: 8
$2.75
When there is an increase in demand:
$2.50
Price
Quantity Demanded
D
7
8
Quantity of
cups of hot
chocolate
Quantity Supplied
Decrease in Supply
Initial Equilibrium
Price: $2.75
Quantity: 7
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
S1
S2
$3.00
New Equilibrium
Price: $3.00
Quantity: 6
When there is an increase in demand:
$2.75
Price
Quantity Demanded
D
6 7
Quantity of
cups of hot
chocolate
Quantity Supplied
Shifts in both Demand and Supply
Increase in Demand & Increase in
Supply
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
Initial Equilibrium
Price: $2.75
Quantity: 7
S1
S2
New Equilibrium
Price: $2.75
Quantity: 7.5
$2.75
In this particular situation…
D1
7 7.5
D2
Quantity of
cups of hot
chocolate
Price stayed the same
Quantity Demanded
Quantity Supplied
Shifts in both Demand and Supply
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
In a situation where both supply and
demand shift in the same direction the
new equilibrium price does not always
stay the same as the initial equilibrium
price.
S1
S2
In fact, the effect on price will vary
depending on the severity of the supply
and demand shifts.
$2.75
D1
7 7.5
D2
Quantity of
cups of hot
chocolate
Shifts in both Demand and Supply
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
S2
Decrease in Demand &
Decrease in Supply
Initial Equilibrium
Price: $2.75
Quantity: 7
S1
New Equilibrium
Price: $2.75
Quantity: 7.5
$2.75
In this particular situation…
D2
5
7
D1
Quantity of
cups of hot
chocolate
Price stayed the same
Quantity Demanded
Quantity Supplied
Shifts in both Demand and Supply
Increase in Demand & Decrease in
Supply
Market for Cups of Hot Chocolate
Price of cups
of hot
chocolate
Initial Equilibrium
Price: $2.75
Quantity: 7
S1
S2
$3.25
New Equilibrium
Price: $3.25
Quantity: 7.5
$2.75
In this particular situation…
D1
7 7.5
D2
Quantity of
cups of hot
chocolate
Price
Quantity Demanded
Quantity Supplied
Shifts in both Demand and Supply
Summary!
DEMAND
SUPPLY
EQUILIBRIUM
PRICE
EQUILIBRIUM
QUANTITY








indeterminate



indeterminate
indeterminate

indeterminate