Principles of Micro

1. Principles of Micro by Tanya Molodtsova, Fall 2005 Chapter 4: “THE MARKET FORCES OF SUPPLY AND DEMAND”

2. 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.

3. 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.

4. Demand Schedule Supply Schedule At $2.00, the quantity demanded is equal to the quantity supplied! III. Supply and Demand Together

5. Price of Ice-Cream Cone Supply Equilibrium Equilibrium price $2.00 Demand Equilibrium quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones The Equilibrium of Supply and Demand

6. 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.

7. (a) Excess Supply Price of Ice-Cream Supply Cone Surplus $2.50 2.00 Demand 0 4 7 10 Quantity of Quantity Quantity Ice-Cream demanded supplied Cones III. Supply and Demand Together

8. 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.

9. (a) Excess Supply Price of Ice-Cream Supply Cone Surplus $2.50 2.00 Demand 0 4 7 10 Quantity of Quantity Quantity Ice-Cream demanded supplied Cones III. Supply and Demand Together

10. 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.

11. Three Steps to Analyzing Changes in Equilibrium: • 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.

12. Shifts in Curves vs. Movements Along Curves • 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."

13. Price of Ice-Cream 1. Hot weather increases Cone the demand for ice cream . . . Supply New equilibrium $2.50 2.00 2. . . . resulting Initial in a higher equilibrium price . . . D D Quantity of 0 7 10 Ice-Cream Cones 3. . . . and a higher quantity sold. How an Increase in Demand Affects the Equilibrium

14. Price of 1. An increase in the Ice-Cream price of sugar reduces Cone the supply of ice cream. . . S2 S1 New equilibrium $2.50 Initial equilibrium 2.00 2. . . . resulting in a higher price of ice cream . . . Demand Quantity of 4 7 0 Ice-Cream Cones 3. . . . and a lower quantity sold. How a Decrease in Supply Affects the Equilibrium

15. 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