Download Section 2: Changes in Market equilibrium

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.