Market Equilibrium Analysis: Supply, Demand, and Efficiency

1. Demand and supply analysis Market equilibrium and Efficiency

2. What is Market Equilibrium • It occurs at the price where the quantity demanded and quantity supplied are equal • Also called the “market-clearing price” – everything put on the market, at that price, is sold

3. The Determination of Price • Equilibrium price and output • response to shortages and surpluses • significance of “equilibrium” • Demand and supply curves

4. Equilibrium price and output:The Market Demand and Supply of Potatoes (Monthly)

5. The determination of market equilibrium(potatoes: monthly) e E Supply d D c C Price (pence per kg) b B a A Demand Quantity (tonnes: 000s)

6. 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

7. 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

8. The determination of market equilibrium(potatoes: monthly) SURPLUS (330 000) e E Excess Supply or Supply d D c C Price (pence per kg) b B a A Demand Quantity (tonnes: 000s)

9. 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

10. 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

11. The determination of market equilibrium(potatoes: monthly) SHORTAGE (300 000) e E Supply d D c C Price (pence per kg) b B a Or Excess Demand A Demand Quantity (tonnes: 000s)

12. 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

13. The determination of market equilibrium(potatoes: monthly) e E Supply d D Price of 60 is the market clearing price Price (pence per kg) b B a A Demand Qe Quantity (tonnes: 000s)

14. 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

15. Effect of a shift in the demand curve An increase in demand P S g Pe1 D1 O Qe1 Q

16. Effect of a shift in the demand curve P S g Pe1 D1 O Qe1 Q

17. Effect of a shift in the demand curve P S g Pe1 D2 D1 O Qe1 Q

18. Effect of a shift in the demand curve i h P S As producers realize they can raise the price, they produce more, a movement upwards along the S curve. As consumers see the higher prices, they decrease the qty demanded, a movement up & left along the new D curve. Pe2 g Pe1 D2 D1 O Qe1 Qe2 Q

19. Effect of a shift in the demand curve A decrease in demand D2 P S g Pe1 D1 O Qe1 Q

20. Effect of a shift in the demand curve m n P S A decrease in D results in surplus; producers will then cut prices to entice buyers (increasing qty demanded, moving down along the D curve. g Pe1 Pe2 D2 D1 O Qe1 Qe2 Q

21. 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

22. 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

23. 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

24. 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

25. Effect of a shift in the supply curve A decrease in supply P S1 g Pe1 D O Qe1 Q

26. Effect of a shift in the supply curve P S1 g Pe1 D O Qe1 Q

27. Effect of a shift in the supply curve P S2 S1 g Pe1 D O Qe1 Q

28. Effect of a shift in the supply curve k j P S2 S1 The reduce supply causes a shortage at the old equilibrium price. Producers therefore begin to increase prices & consumers respond by decreasing the qty demanded. Pe3 g Pe1 D O Qe3 Qe1 Q

29. Effect of a shift in the supply curve S2 An increase in supply P S1 g Pe1 D O Qe1 Q

30. Effect of a shift in the supply curve q P S1 S2 g p Pe1 Pe2 D O Qe2 Qe1 Q

31. Time for you to draw

32. Using fully labeled diagrams, illustrate what will happen to the equilibrium price and quantity in each of the situations, and then explain what has happened.

33. There has been a health scare relating to the consumption of chicken.

34. Effect of a shift in the demand curve A decrease in demand P S Pe1 Pe2 D2 D1 O Qe1 Qe2 Q

35. There has been an increase in the costs of production in the motorcycle industry.

36. Effect of a shift in the supply curve A decrease in supply P S1 g Pe1 D O Qe1 Q

37. Effect of a shift in the supply curve P S1 g Pe1 D O Qe1 Q

38. Effect of a shift in the supply curve P S2 S1 g Pe1 D O Qe1 Q

39. Effect of a shift in the supply curve k j P S2 S1 Pe3 g Pe1 D O Qe3 Qe1 Q

40. There has been an improvement in production technology in the textile industry.

41. Effect of a shift in the supply curve S2 An increase in supply P S1 g Pe1 D O Qe1 Q

42. Effect of a shift in the supply curve q P S1 S2 g p Pe1 Pe2 D O Qe2 Qe1 Q

43. Manufacturers in the sportswear industry have decided to raise the price of training shoes.

44. Increase in Price SURPLUS An increase in price P S P1 P e D1 O Qe Q2 Q1 Q

45. Role of Price in Resource Allocation

46. Price Mechanism Forces of supply and demand move markets to equilibrium Helps to allocate scarce resources Resources are allocated and re-allocated in response to changes in price If there is an increase in the price of a good, due to an increase in demand for the good, this gives a ‘signal’ to producers that consumers wish to buy this good Higher price will give producers an incentive to produce more of a good

47. Effect of a shift in the demand curve i h P As producers realize they can raise the price, they produce more, a movement upwards along the S curve. As consumers see the higher prices, they decrease the qty demanded, a movement up & left along the new D curve. New higher equilibrium price signals product scarcity. S Pe2 g Pe1 D2 D1 O Qe1 Qe2 Qe3 Q

48. Effect of a shift in the supply curve S2 An increase in supply P S1 g Pe1 D O Qe1 Q

49. Effect of a shift in the supply curve q P S1 S2 g p Pe1 Pe2 D O Qe2 Qe1 Q3 Q

50. Answer Worksheet 3.2 Questions Gas Prices: From Disequilibrium to Equilibrium