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Market Equilibrium I) Market System a) Individuals make choices about what to consume. b) These choices send signals to producers. b) Producers respond to that signal II) Equilibrium The Forces of Supply & Demand balance each other out S P E D Q • A) Where the quantity supplied = the quantity demanded; where price for supply=price for demand • B) On a graph, it’s where the supply and demand curves intersect. III) Shortages Either supply is too low or Demand is too high S P E P1 D QD QS Q • A) Quantity demanded is greater than quantity supplied • B) Creates upward pressure on the price • C) Consumers are willing to pay more/prices are too low. IV) Surplus Either Supply is too high or Demand is too low. S P1 E D QD QS • A) Quantity supplied is greater than quantity demanded. • B) Creates downward pressure on the price. • C) Consumers are not willing to pay the prices/prices are too high. V) Change in Demand • A) Increase in Demand (shift to the right) causes a shortage S P2 P1 – 1) Prices Rise – 2) Quantity exchanged rises E2 E1 Q1 D2 D1 Q2 b) Decrease in demand (shift to the left) causes a surplus S E1 P1 P2 E2 Q2 D2 Q1 D1 • 1) Prices fall • 2) Quantity exchanged falls VI) Change in Supply • A) increase in supply (shifts to the right) causes a surplus S1 S2 P1 E1 P2 E2 D Q1 Q2 – 1) prices fall – 2) quantity exchanged rises b) Decrease in supply (shifts to the left) causes a shortage • 1) prices rise • 2) quantity exchanged S1 falls S2 P2 P1 D Q2 Q1