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Equilibrium Price

The document discusses supply and demand curves and how they determine equilibrium price and quantity. It explains how shortages and surpluses are eliminated through price adjustments. It also analyzes how shifts in supply and demand curves affect equilibrium, including examples of substitute goods and changes in demand for specific markets.

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1K views

Equilibrium Price

The document discusses supply and demand curves and how they determine equilibrium price and quantity. It explains how shortages and surpluses are eliminated through price adjustments. It also analyzes how shifts in supply and demand curves affect equilibrium, including examples of substitute goods and changes in demand for specific markets.

Uploaded by

api-181176018
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Supply and demand together

Put supply and demand curves on the same graph Intersection gives the equilibrium price and quantity

Price

PE

QE

Quantity

PE and QE represent the equilibrium price and quantity


2

What is Equilibrium Price?


The price that equates the quantity demanded and the quantity supplied

1999 South-Western College 3 Publishing

What happens if price is below equilibrium?


A shortage, or excess demand, arises

At P2, QD > QS, thus a shortage or excess demand exists

S
P2
QS
5

Shortage
QD

D
5

How is the shortage eliminated?


The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied.
6

What happens if price is above equilibrium?


A surplus, or excess supply, arises

At P1, QD < QS, thus a surplus or excess supply exists

P1

Surplus

S
D

QD
8

QS
8

How is the surplus eliminated?


The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded.

Summary, shortages, surpluses, and equilibrium

P1 P3 P2

Surplus
Shortage

S
D
10

1999 South-Western College 1 Publishing 0

Q3

How shifts in S and D affect equilibrium price and quantity

1 1

Right Shift in Demand

P2 P1

S
D2 D1
Q1

Q2

12

1999 South-Western College 1 Publishing 2

Left Shift in Demand P1 P2

S1 D2
Q2

D1
13

Q1

1999 South-Western College 1 Publishing 3

Summary, demand changes


Increased demand, price and quantity both rise Decreased demand, price and quantity both fall

1 4

Right Shift in Supply

S1
P1 P2

S2

D
Q1 Q2
1 5
1999 South-Western College 1 Publishing 5

Left Shift in Supply

S2
P2 P1

S1

D
Q2 Q1
1 6
1999 South-Western College 1 Publishing 6

Summary, supply changes


Increased supply, price falls, quantity rises Decreased supply, price rises, quantity falls

1 7

If both curves shift, can predict price or quantity, but not both unless the magnitude of the shifts are known

1 8

Supply and demand problems


Suppose apples and oranges are substitutes to consumers: Bad weather destroys many apple orchards--what happens to equilibrium price and quantity in the apple market? In the Orange market?? Illustrate graphically.

19

S1 P P S

S
P2 P2 P1 P1 D D D1

Q2

Q1

Q1

Q2

Apple market, supply decreases, price rises, quantity falls

Orange market, demand increases, price and quantity rise

20

Oprah Winfrey says on tv that she will never eat another hamburger. What might happen to the equilibrium price and quantity in the beef market? Show graphically with supply and demand curves.
21

Decrease in demand in the beef

market, price and quantity fall

P1 P2

S1 D2
Q2 Q1
22 22

D1

The demand for computers has clearly increased over time, due to higher incomes and changing preferences towards computers. Despite the increased demand, the price of computers has continued to fall. Show graphically with supply and demand curves how this could happen, and give some possible explanations.

23

P2

S1

P1 P3

D1
D

If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more 24

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