Download Ch. 3 Ppt: Competitive Dynamics (Raposo)

Increases and Decreases in
Supply and Demand
Mr. Raposo
Thursday, September 27, 2006
Agenda
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Market Equilibrium
Increase/decrease in supply
Increase/decrease in demand
Continue exercise on supply and demand
Market Equilibrium

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The stable point at which demand and
supply curves intersect
Quantity Supplied = Quantity Demanded
Whenever the market is out of equilibrium,
supply can’t keep up with demand or
demand can’t keep up with supply
Market Equilibrium
P$
S
D
0
Q
Quantity
Effect of an Increase in Demand
D
D1
S
P1
P
0
Q Q1
Real Output
An Increase in the Demand for DVD Players
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An increase in the demand for DVD players
causes the demand curve to shift to the
right. The shift from D1 to D2 causes a
temporary shortage (of 100 DVD’s). As a
result, price rises until a new equilibrium
point of supply and demand is reached. The
new equilibrium price is $5 and 300 DVD
players.
Price has increased by $1 and quantity has
fallen by 50 DVD players
.
An Increase in the Demand for DVD Players
5
D2
Shortage of 100
300
(thousands)
Effect of a Decrease in Demand
D
S
D0
P
P0
0
Q0 Q
Real Output
A Decrease in the Demand for DVD Players
Surplus of 100
3
D0
200
(thousands)
A decrease in the Demand for DVD Players
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A decrease in the demand for DVD players
causes the demand curve to shift to the left.
The shift from D1 to D0 causes a temporary
surplus (of 100 DVD’s). As a result, price
falls until a new equilibrium point of supply
and demand is reached. The new
equilibrium price is $3 and 200 DVD
players.
Price has decreased by $1 and quantity has
fallen by 50 DVD players
.
An Increase in the Supply of DVD Players
Surplus of 100
3
300
(thousands)
S2
An Increase in the Supply of DVD Players

An increase in the supply of DVD players
causes the supply curve to shift to the right.
The shift from S1 to S2 causes a temporary
surplus (of 100 DVD’s). As a result, price
falls until a new equilibrium point of supply
and demand is reached. The new
equilibrium price is $3 and 300 DVD
players ( a fall in price by $1 and a rise in
quantity by 50 DVD players).
A Decrease in the Supply of DVD Players
S0
5
Shortage of 100
200
(thousands)
A Decrease in the Supply of DVD Players



An decrease in the supply of DVD players
causes the supply curve to shift to the left.
The shift from S1 to S0 causes a temporary
shortage (of 100 DVD’s). As a result, price
rises until a new equilibrium point of supply
and demand is reached. The new
equilibrium price is $5 and 200 DVD
players.
Price has increased by $1 and quantity has
fallen by 50 DVD players
.
Summary
Ceteris Paribus…….
 Increase in supply causes a decrease in price
and an increase in quantity
 Decrease in supply causes an increase in
price and an decrease in quantity
 Increase in demand causes an increase in
price and an increase in quantity
 Decrease in demand causes an decrease in
price and an decrease in quantity
Price Controls: Price Floors
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Refer to separate slideshow
Consumer Surplus
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Refer to separate show