Principles of Micro

Chapter 4: “THE MARKET FORCES OF SUPPLY AND DEMAND” III. Supply and Demand Together: Equilibrium   The point where the supply and demand curves intersect is called the market’s equilibrium. equilibrium: a situation in which the price has reached the level where quantity supplied equals quantity demanded. III. Supply and Demand Together: Equilibrium     equilibrium price: the price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect. III. Supply and Demand Together Demand Schedule Supply Schedule At $2.00, the quantity demanded is equal to the quantity supplied! The Equilibrium of Supply and Demand Price of Ice-Cream Cone Supply Equilibrium price Equilibrium $2.00 Equilibrium quantity Demand 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones III. Supply and Demand Together    When market price > the equilibrium price  there will be a surplus of the good. surplus: a situation in which quantity supplied > quantity demanded. To eliminate the surplus, producers will lower the price until the market reaches equilibrium. III. Supply and Demand Together (a) Excess Supply Price of Ice-Cream Cone Supply Surplus $2.50 2.00 Demand 0 4 Quantity demanded 7 10 Quantity supplied Quantity of Ice-Cream Cones III. Supply and Demand Together    When price < equilibrium price then there will be a shortage of the good. shortage: a situation in which quantity demanded > quantity supplied. Sellers will respond to the shortage by raising the price of the good until the market reaches equilibrium. III. Supply and Demand Together (a) Excess Supply Price of Ice-Cream Cone Supply Surplus $2.50 2.00 Demand 0 4 Quantity demanded 7 10 Quantity supplied Quantity of Ice-Cream Cones III. Supply and Demand Together  Law of Supply and Demand: the claim that the price of any good adjusts to bring the supply and demand for that good into balance. Three Steps to Analyzing Changes in Equilibrium: 1. 2. 3. Decide whether the event shifts the supply or demand curve (or both). Decide in which direction the curve shifts. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity. Shifts in Curves vs. Movements Along Curves 1. 2. A shift in the demand curve is called a "change in demand." A shift in the supply curve is called a "change in supply." A movement along a fixed demand curve is called a "change in quantity demanded." A movement along a fixed supply curve is called a "change in quantity supplied." How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 1. Hot weather increases the demand for ice cream . . . Supply New equilibrium $2.50 2.00 2. . . . resulting in a higher price . . . Initial equilibrium D D 0 7 3. . . .and a higher quantity sold. 10 Quantity of Ice-Cream Cones How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone S2 1. An increase in the price of sugar reduces the supply of ice cream. . . S1 New equilibrium $2.50 Initial equilibrium 2.00 2. . . . resulting in a higher price of ice cream . . . 0 Demand 4 7 3. . . .and a lower quantity sold. Quantity of Ice-Cream Cones A Change in Both Supply and Demand   if you do not know the relative sizes of these shifts, the end effect on either equilibrium price or equilibrium quantity will be ambiguous. The outcome depends on the relative sizes of the shifts in supply and demand