Download Introduction to Market Equilibrium

Market Equilibrium
The Determination of Price
• Equilibrium price and output
– response to shortages and surpluses
– significance of “equilibrium”
• Demand and supply curves
The determination of market equilibrium
(potatoes: monthly)
E
e
100
Price (pence per kg)
Supply
d
D
80
Cc
60
b
40
B
a
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
The Determination of Price
• Equilibrium price and output
– response to shortages and surpluses
– significance of “equilibrium”
• Demand and supply curves
– effect of price being above equilibrium
The Determination of Price
• Equilibrium price and output
– response to shortages and surpluses
– significance of “equilibrium”
• Demand and supply curves
– effect of price being above equilibrium
• surplus  price falls
The determination of market equilibrium
(potatoes: monthly)
E
e
100
Price (pence per kg)
Supply
D
80
SURPLUS
d
(330 000)
Cc
60
b
40
B
a
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
The Determination of Price
• Equilibrium price and output
– response to shortages and surpluses
– significance of “equilibrium”
• Demand and supply curves
– effect of price being above equilibrium
• surplus  price falls
– effect of price being below equilibrium
The Determination of Price
• Equilibrium price and output
– response to shortages and surpluses
– significance of “equilibrium”
• Demand and supply curves
– effect of price being above equilibrium
• surplus  price falls
– effect of price being below equilibrium
• shortage  price rises
The determination of market equilibrium
(potatoes: monthly)
E
e
100
Price (pence per kg)
Supply
d
D
80
Cc
60
b
40
SHORTAGE
B
(300 000)
a
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
The Determination of Price
• Equilibrium price and output
– response to shortages and surpluses
– significance of “equilibrium”
• Demand and supply curves
– effect of price being above equilibrium
• surplus  price falls
– effect of price being below equilibrium
• shortage  price rises
– equilibrium: where D = S
The determination of market equilibrium
(potatoes: monthly)
E
e
100
Price (pence per kg)
Supply
d
D
80
60
b
40
B
a
A
20
Demand
0
0
100
200
300
Qe 400
500
Quantity (tonnes: 000s)
600
700
800
The Determination of Price
• Effects of shifts in the demand curve
– movement along S curve and new D curve
• rise in demand (rightward shift)  P rises
• fall in demand (leftward shift)  P falls
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Q e1
Q
Effect of a shift in the demand curve
P
S
g
Pe1
D1
O
Q e1
Q
Effect of a shift in the demand curve
P
S
g
Pe1
D2
D1
O
Q e1
Q
Effect of a shift in the demand curve
P
S
i
Pe2
g
h
Pe1
D2
D1
O
Q e1
Q e2
Q
The Determination of Price
• Effects of shifts in the demand curve
– movement along S curve and new D curve
• rise in demand (rightward shift)  P rises
• fall in demand (leftward shift)  P falls
• Effects of shifts in the supply curve
The Determination of Price
• Effects of shifts in the demand curve
– movement along S curve and new D curve
• rise in demand (rightward shift)  P rises
• fall in demand (leftward shift)  P falls
• Effects of shifts in the supply curve
– movement along D curve and new S curve
The Determination of Price
• Effects of shifts in the demand curve
– movement along S curve and new D curve
• rise in demand (rightward shift)  P rises
• fall in demand (leftward shift)  P falls
• Effects of shifts in the supply curve
– movement along D curve and new S curve
• rise in supply (rightward shift)  P falls
The Determination of Price
• Effects of shifts in the demand curve
– movement along S curve and new D curve
• rise in demand (rightward shift)  P rises
• fall in demand (leftward shift)  P falls
• Effects of shifts in the supply curve
– movement along D curve and new S curve
• rise in supply (rightward shift)  P falls
• fall in supply (leftward shift)  P rises
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Q e1
Q
Effect of a shift in the supply curve
P
S1
g
Pe1
D
O
Q e1
Q
Effect of a shift in the supply curve
P
S2
S1
g
Pe1
D
O
Q e1
Q
Effect of a shift in the supply curve
P
S2
S1
k
Pe3
j
g
Pe1
D
O
Q e3
Q e1
Q