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Econ 101: Microeconomics

Econ 101: Microeconomics. Chapter 3: Supply and Demand Part 2. Equilibrium: Putting Supply and Demand Together. When a market is in equilibrium Both price of good and quantity bought and sold have settled into a state of rest Equilibrium price, p*, is a “Market clearing” price:

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Econ 101: Microeconomics

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  1. Econ 101: Microeconomics Chapter 3: Supply and Demand Part 2

  2. Equilibrium: Putting Supply and Demand Together • When a market is in equilibrium • Both price of good and quantity bought and sold have settled into a state of rest • Equilibrium price, p*, is a “Market clearing” price: • Price at which quantity supplied ________________ quantity demanded. This quantity is called the Equilibrium quantity, Q*. • The equilibrium price and equilibrium quantity can be found on the _________ and _________ axes, respectively • At point where supply and demand curves cross

  3. Price Quantity Equilibrium price (p*) : the price that “balances” quantity supplied and quantity demanded. Equilibrium Market Equilibrium Supply E P* Demand Q*

  4. Price Suppose price starts out below the equilibrium level: Disappointed demanders will bid up the price, driving price up toward equilibrium. Quantity Excess Demand S E p* J H p1 D Excess Demand Q1 Q2 Q*

  5. Excess Demand • Excess demand • At a given price, the excess of quantity demanded over quantity supplied • Price of the good will rise as buyers compete with each other to get more of the good than is available

  6. Suppose price starts out above the equilibrium level: Disappointed supplier will undercut rivals’ prices, driving price down toward equilibrium. Price Quantity Excess Supply S Excess Supply p1 L K E p* D Q* Q1 Q2

  7. Excess Supply • Excess Supply • At a given price, the excess of quantity supplied over quantity demanded • Price of the good will fall as sellers compete with each other to sell more of the good than buyers want

  8. Income Rises: What Happens When Things Change • Income rises, causing ___________ in demand • __________ shift in the demand curve causes _________ movement along the supply curve • Equilibrium price and equilibrium quantity both _________ • Shift of one curve causes a movement along the other curve to new equilibrium point

  9. 3. to a new equilibrium. 4. Equilibrium price increases Price per Bottle 2. moves us along the supply curve . . . 1. An increase in demand . . . Number of Bottles of Maple Syrup per Period 5. and equilibrium quantity increases too. Increase in Income S F' $4.00 E 3.00 D2 D1 50,000 60,000

  10. An Ice Storm Hits: What Happens When Things Change • An ice storm causes _________ in _______ • Weather is _________ variable for _______ curve • Any change that shifts the supply curve leftward in a market will increase the equilibrium price • And decrease the equilibrium quantity in that market

  11. Price per Bottle Number of Bottles A Shift of Supply and A New Equilibrium S2 S1 E' $5.00 3.00 E D 35,000 50,000

  12. Price per Handheld PC 3. moved the market to a new equilibrium. 2. and a decrease in demand . . . 4. Price decreased . . . 1. An increase in supply . . . Millions of Handheld PCs per Quarter 5. and quantity decreased as well. Changes in the Market for Handheld PCs S2002 S2003 A $500 B $400 D2002 D2003 2.45 3.33

  13. Both Curves Shift • When just one curve shifts (and we know the direction of the shift) we can determine the direction ___________________________ ____________________ • When both curves shift (and we know the direction of the shifts) we can determine the direction ____________________________ ______________________ • Direction of the other will depend on which curve shifts by more

  14. The Three Step Process • Key Step 1—Characterize the Market • Decide which market or markets best suit problem being analyzed and identify decision makers (buyers and sellers) who interact there • Key Step 2—Find the Equilibrium • Describe conditions necessary for equilibrium in the market, and a method for determining that equilibrium • Key Step 3—What Happens When Things Change • Explore how events or government polices change market equilibrium

  15. Using Supply and Demand: The Invasion of Kuwait • Why did Iraq’s invasion of Kuwait cause the price of oil to rise? • Immediately after the invasion, United States led a worldwide embargo on oil from both Iraq and Kuwait • A significant decrease in the oil industry’s productive capacity caused a shift in the supply curve to the left • Price of oil increased

  16. Price per Barrel of Oil Barrels of Oil The Market For Oil S2 S1 E' P2 E P1 D Q2 Q1

  17. Using Supply and Demand: The Invasion of Kuwait • Why did the price of natural gas rise as well? • Oil is a substitute for natural gas • Rise in the price of a substitute increases demand for a good • Rise in price of oil caused demand curve for natural gas to shift to the right • Thus, the price of natural gas rose

  18. Price per Cubic Foot of Natural Gas Cubic Feet of Natural Gas The Market For Natural Gas S F' P4 F D2 P3 D1 Q3 Q4

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