unit 2 3 lesson 6 - market equilibrium

Market Equilibrium & Efficiency Where Demand meets Supply

Learning outcomes: ● Expl Explai ain n the the inte intera ract ctio ion n of sup suppl ply y & dema demand nd to produce market equilibrium. ● Anal Analyz yze e usin using g diag diagra rams ms how how cha chang nges es in in the the non-price determinants of supply/demand change market equilibrium. ● Iden Identi tify fy usi using ng dia diagr gram ams, s, exc exces ess s supp supply ly & demand in a market.

Market Equilibrium Equilibrium Market Equilibrium: the price where the quantity demanded is equal to the quantity supplied.  Also called market clearing price

Excess Supply Market disequilibrium where the market is not efficient. Occurs when the price is set above the market clearing price such that Quantity Supplied > Quantity Demanded

Excess Demand Market disequilibrium where the market is not efficient. Occurs when the price is set below the market clearing price. Quantity Demanded > Quantity Supplied

http://www.amosweb.com/images http://www.amosweb.com/images/ExDm001w.gif  /ExDm001w.gif 

Function of Price 1.

2. 3.

4.

5.

Price Price is the the sys syste tem m use used d to to org organ aniz ize e the the allocation of our scarce resources. resources. Answers: How & What... Decr Decrea ease se supp supply ly (S-S (S-S1) 1) caus causes es excess demand  at  at price P : Qd (e) > Qs (e1). Incentive for Incentive for firms to increase Price from PP1. Movement along the supply curve from e1 - e2 decreasing Quantity supplied. As Pric Price e incr increa ease ses, s, the the Rationing effect  of  of consumers to decrease Qd moving along the Demand curve from e - e2. Mark Market et eve event ntua uall lly y reac reache hes s clea cleari ring ng pri price ce &

Changes in Demand 1. 2. 3.

4.

Incr Increa ease se in Dema Demand nd (D1(D1-D2 D2). ). At Pric Price e P1 P1 - Qd2 Qd2 >Qs >Qs1 1 cre creat atin ing g excess demand at P1. Sign Signal al to the the mar marke kett to to inc incre reas ase e price from P1 - P2 thus increasing the Qs. Ther Theref efor ore, e, an an incr increa ease se in in Dema Demand nd from D1 - D2 due to a change in a non-price determinant of Demand leads to an increase in Price from P1 - P2 and an increase in Quantity Supplied  from  from Q1 - Q2.

http://www.personal.psu.edu/~dxl31/econ2/S http://www.personal.ps u.edu/~dxl31/econ2/Spring_2006/demand_increas pring_2006/demand_increase.png e.png

Decrease in Demand 1. 2. 3.

4.

Decr Decrea ease se in Dema Demand nd (D-D (D-Dne new) w).. At Pric Price e P1 P1 - Qs > Qdn Qdnew ew crea creati ting ng excess supply at P1. Sign Signal al to the the mar marke kett to to dec decre reas ase e price from P1 - P2 thus decreasing the Qs. Ther Theref efor ore, e, a dec decre reas ase e in in Dem Deman and d from D - Dnew due to a change in a non-price determinant of Demand leads to an decrease in Price from P1 - P2 and a decrease in Quantity Supplied  from  from Q1 - Q2.

http://www.raybromley.com/notes http://www.raybromley.com/notes/noteimages/equilibrium/dec /noteimages/equilibrium/decrdemandeq.jpg rdemandeq.jpg

Increase Supply 1. 2. 3.

4.

Incr Incre ease ase in in Sup Supp ply (S - S1 S1). At Pric Price e P - Qs Qs1 1 >Q >Qd d crea creati ting ng excess supply at P. Sign Signal al to the the mar marke kett to to dec decre reas ase e price from P - P1 thus increasing the Qd from Q - Q1. Ther Theref efor ore, e, an an incr increa ease se in in Supp Supply ly from S - S1 due to a change in a non-price determinant of Supply leads to an decrease in Price from P - P1 and an increase in Quantity Demanded  from  from Q - Q1.

Decrease Supply 1. 2. 3.

4.

Decr Decre ease ase in in Su Supply pply (S - S1) S1).. At Pric Price e P - Qd > Qs1 Qs1 crea creati ting ng excess demand at P. Sign Signal al to the the mar marke kett to to inc incre reas ase e pri price ce from P - P1 thus decreasing the Qd from Q - Q1. Ther Theref efor ore, e, an an decr decrea ease se in in Supp Supply ly from S - S1 due to a change in a nonprice determinant of Supply leads to an increase in Price from P - P1 and an decrease in Quantity Demanded  from Q - Q1