Download Chapter 6 Section Main Menu Combining Supply and Demand How

Combining Supply and Demand
• How do supply and demand create balance in the
marketplace?
• What are differences between a market in equilibrium
and a market in disequilibrium?
Chapter 6
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1st… another shameless commercial
donut
It’s a
SALE abration !
only.50 ea
hurry while
they last!
mmmm….crap to eat
Chapter 6
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Market Disequilibrium
Markets are often in a state of “disequilibrium”
There are two causes:
1. Excess Demand
occurs when quantity demanded is more
than quantity supplied
Ex: Renner sells doughnuts @ .50 ea
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New Shipment Just Arrived !
DONUTS
New and Improved
$2.00 ea
Hurry! Won’t Last…
Chapter 6
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Market Disequilibrium
2. Excess Supply
occurs when quantity supplied exceeds
quantity demanded
Ex: Renner sells doughnuts @ $2.00 ea
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Balancing the Market
The point at which quantity demanded and quantity
supplied come together is known as equilibrium.
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
Price of
a donut
Quantity
demanded
Quantity
supplied
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
Result
$2.50
$2.00
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
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50
a
Equilibrium
Quantity
Price per donut
$3.00
100 150 200 250
Quantity of Donuts
Section
Demand
300
350
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Shortage from
excess demand
Equilibrium
Surplus from
excess supply
Sec. 2
Changes in Market Equilibrium
• How do shifts in supply affect market equilibrium?
• How do shifts in demand affect market equilibrium?
• How can we use supply and demand curves to analyze
changes in market equilibrium?
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Shifts in Demand
• Excess Demand creates a “shortage”
– A shortage is a situation in which quantity
demanded is greater than quantity supplied
– Suppliers react by:
• Raising prices…possibly increasing supply
• A Decline in Demand itself
– Because of a change in market conditions such as:
• customer preferences (tastes)
• population
• income
– When demand falls, suppliers respond by cutting
prices, and a new market equilibrium is found.
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Shifts in Supply
• Understanding a Shift
– A change in supply will lead the market to a new
equilibrium price and quantity sold.
• Excess Supply:
“surplus”
– If a surplus occurs, producers reduce prices to sell
their products, and possibly decrease supply. This
creates a new market equilibrium.
• A Fall in Supply
– The opposite occurs: As supply decreases, producers
will raise prices and demand will decrease.
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Analyzing Shifts in Supply and Demand
Graph A: A Change in Supply
Graph B: A Change in Demand
$800
$60
a
Supply
$50
b
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
4
5
0
100
Output (in millions)
200
300
400
500
600
700
Output (in thousands)
• Graph A shows how the market finds a new equilibrium
when there is an increase in supply (examples)
• Graph B shows how the market finds a new equilibrium
when there is an increase in demand (examples)
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800
900
Declining Supply Raises Prices
Graph C: A Decrease in Supply = Higher Prices
$800
a
b
Price
$600
$400
New
supply
c
$200
0
Original
supply
1
Demand
2
3
4
5
Output (in millions)
• Graph C shows how the market finds a new equilibrium
when there is an decrease in supply.
Chapter 6
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Supply and Demand: Equilibrium
Equilibrium
Chapter 6
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Coloring Day #3
Supply & Demand 8GB
Flashdrives
Chapter 6
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Sec. 3
The Role of Prices
• What role do prices play in a free market system?
• What advantages do prices offer?
• What happens when prices are artificially set?
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The Role of Prices in a Free Market
In most cases, the price of anything is the result
of the interaction between
S and D:
• Prices help move land, labor, and capital into the hands
of producers, and finished goods into the hands of
buyers.
• Prices create an efficient way to allocate (“distribute”)
resources for producers (recall the 3 basic q’s of
econ?)
•
Create a language that both consumers and producers
can use…let’s go a bit deeper on this point…
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Advantages of Prices
Prices provide a language for buyers and sellers.
1. Prices work as an Incentive
Prices communicate to both buyers and sellers whether goods or
services are scarce or easily available. Prices can encourage or
discourage production.
2. Signals
Think of prices as a traffic light. A relatively high price is a green light
telling producers to make more. A relatively low price is a red light
telling producers to make less.
3. Flexibility
In many markets, prices are much more flexible than production levels.
They can be easily increased or decreased to solve
problems of excess supply or excess demand.
4. Price System is "Free"
Unlike central planning, a distribution system based on prices costs
nothing to administer.
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Price Ceilings
In some cases the government steps in to
control prices. These interventions appear as
price ceilings and price floors.
• A price ceiling is a maximum price that can be legally
charged for a good.
• Example #1: rent control, a situation where a government
sets a maximum amount that can be charged for rent in an
area.
• Example #2: During WWII, the U.S. Gov’t. froze wages AND
prices to ensure war production was not interrupted
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Price Floors
• A price floor is a minimum price, set by
the government, that must be paid for a
good or service.
• One well-known price floor is the
minimum wage, which sets a minimum
price that an employer can pay a worker
for an hour of labor.
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The Great Tortilla Crisis:
• A sharp rise in the price of tortillas, a staple food of Mexico’s poor,
which had gone from 25 cents a pound to between 35 and 45 cents a
pound in just a few months in early 2007.
Why were tortilla prices soaring?
• It was a classic example of what happens to equilibrium prices when
supply falls. Tortillas are made from corn; much of Mexico’s corn is
imported from the United States, with the price of corn in both
countries basically set in the U.S. corn market. And U.S. corn prices
were rising rapidly thanks to surging demand in a new market: the
market for ethanol.
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Demand and Supply Shifts at Work
in the Global Economy
• A recent drought in Australia reduced the amount of grass on
which Australian dairy cows could feed, thus limiting the
amount of milk these cows produced for export.
• At the same time, a new tax levied by the government of
Argentina raised the price of the milk the country exported,
thereby decreasing Argentine milk sales worldwide.
• These two developments produced a supply shortage in the
world market, which dairy farmers in Europe couldn’t fill
because of strict production quotas set by the European
Union.
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