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Chapter 6 SECTION 2: CHANGES IN MARKET EQUILIBRIUM Why does the market tend towards equilibrium? Excess demand leads firms to raise prices, higher prices induce the quantity supplied to rise & the quantity demanded to fall until the two are equal Excess supply will force firms to cut prices & falling prices cause quantity demanded to rise & quantity supplied to fall until they are equal Changes in Price Shifts in the supply curve caused by advances in technology, new government taxes & subsidies, & changes in the price of raw materials & labor Shift in the supply curve will change the equilibrium price & quantity Understanding a Shift in Supply As firms develop better technology for producing a good, the price falls Finding a New Equilibrium Lower costs shift the supply curve to the right where at each price, producers are willing to supply a larger quantity Surplus- when quantity supplied exceeds quantity demanded Changing Equilibrium Not usually an unchanging, single point on a graph Follows the intersection of the demand & supply curves as that point moves downward along the demand curve A Fall in Supply When the supply curves shifts to the left, the equilibrium price & quantity sold will change as well As the supply curve shifts to the left, suppliers raise their prices & the quantity demanded falls New equilibrium price will be above & to the left of the original Market price higher, quantity sold is lower Shifts in Demand The problem of excess demand Fad causes a sudden increase in market demand, & demand curve shifts to the right Leads to excess demand (shortage) Appears as empty shelves & long lines Leads to search costs What are search costs? Available products must be rationed Return to Equilibrium As time passes, firms will raise prices Eventually price equals quantity demanded A Fall in Demand What causes a fall in demand? Excess demand turns into excess supply Demand curve shifts to the left & prices cut Analyzing Shifts in Supply & Demand Graph A: A Change in Supply Graph B: A Change in Demand $800 $60 a b Supply $50 Original supply $40 c Price Price $600 $400 c $30 a b $20 $200 New supply Demand New demand Original demand $10 0 1 2 3 Output (in millions) 4 5 0 100 200 300 400 500 600 700 800 900 Output (in thousands) Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand.