Market Equilibrium
Introduction to Demand
The forces of supply and demand work together to set prices.
Demand is the desire, willingness, and ability to buy a good or
service.
Supply can refer to one individual consumer or to the total demand
demand for?
Introduction to Demand
A demand schedule is a table that lists the various
Quantity Demanded of
Widget per day
$5
$4
$3
$2
$1
10
Introduction to Demand
A demand schedule can be shown as points on a graph.
The graph lists prices on the vertical axis and quantities
$5
$4
$3
Demand Curve for Widgets
$2
$1
$0
0
6
8
Quantity Demanded of Widgets
10
12
Introduction to Demand
The demand curve slopes downward.
This shows that people are normally willing to buy less of a
$6
$5
$4
$3
Demand Curve for Widgets
$2
$1
$0
0
4
6
8
10
Quantity Demanded of Widgets
12
Introduction
to
Demand
Introduction to Demand
One reason the demand curve slopes downward is due to
diminish marginal utility
Changes in Demand
$6
$5
$4
$3
Demand Curve for Widgets
$2
$1
$0
0
6
8
Quantity Demanded of Widgets
10
12
Changes in Demand
Demand Curves can also shift in response to the following
factors:
Buyers (# of): changes in the number of consumers
future
Related goods: compliments and substitutes
BITER: factors that shift the demand curve
Changes in Demand
Prices of related goods affect on demand
Substitute goods a substitute is a product that can be used in the
place of another.
The price of the substitute good and demand for the other good are directly
related
For example, Coke Price
Pepsi Demand
Changes in Demand
Demand
Increase
Curve
in Demand
for Widgets
$6$6
As an example, suppose
consumer income
increases. The demand for
Widgets at all prices will
increase.
$5$5
$4$4
$3$3
$2$2
$1$1
$0$0
00
2 2
6
6
8
8
Quantity
QuantityDemanded
Demanded
ofofWidgets
Widets
10
10
12
12 14
Changes in Demand
Demand
Decrease
Curve
in Demand
for Widgets
$6$6
As an example, suppose
Widgets become less
popular to own.
$5$5
$4$4
$3$3
$2
$2
$1
$1
$0
$0
0
0
6
8
6
Quantity Demanded
of Widgets 8
Quantity Demanded of Widgets
10
10
12
12
Changes in Demand
Changes in any of the factors other than price causes the
demand curve to shift either:
Decrease in Demand shifts to the Left (Less demanded at
each price)
OR
Increase in Demand shifts to the Right (More demanded at
each price)
Demand Practice
Price
D1
D
Quantity
Price
D1
D
Quantity
Price
D1
D
Quantity
Price
D1
D
Quantity
Price
D1
D
Quantity
Price
D1
D
Quantity
Price
D
Quantity
Introduction to Supply
Introduction to Supply
A supply schedule is a table that shows the quantities
$5
10
$4
$3
$2
$1
Introduction to Supply
A supply schedule can be shown as points on a graph.
The graph lists prices on the vertical axis and quantities
$5
$4
$3
Supply Curve
$2
$1
$0
0
6
Quantity Supplied of Widgets
10
12
Introduction to Supply
As the price for a good rises, the quantity supplied rises and
the quantity demanded falls. As the price falls, the quantity
supplied falls and the quantity demanded rises.
The law of supply holds that producers will normally offer
more for sale at higher prices and less at lower prices.
Supply Curve for Widgets
$6
$5
$4
$3
Supply Curve
$2
$1
$0
0
4
6
8
Quantity Supplied of Widgets
10
12
Introduction to Supply
The reason the supply curve slopes upward is due to costs and
profit.
Producers purchase resources and use them to produce output.
Producers will incur costs as they bid resources away from their
alternative uses.
Introduction to Supply
Businesses provide goods and services hoping to make a
profit.
Changes in Supply
$5
$4
$3
Supply Curve
$2
$1
$0
0
6
Quantity Supplied of Widgets
10
12
Changes in Supply
Supply Curves can also shift in response to the following factors:
Subsidies and taxes: government subsides encourage production,
Changes in Supply
Several factors will
change the demand for
the good (shift the entire
demand curve)
Supply
Increase
Curveinfor
Supply
Widgets
$6
As an example, suppose
that there is an
improvement in the
technology used to
produce widgets.
$5
$4
$3
$2
$1
$0
0
6
6 8
Quantities
Quantity
Supplied
Supplied
of Widgets
of Widgets
810
12 10
14
12
Changes in Supply
Supply can also decrease
due to factors other than
a change in price.
Supply
Decrease
in Curve
Supplyfor Widgets
$6
As an example, suppose
that a large number of
Widget producers go out
of business, decreasing
the number of suppliers.
$5
$4
$3
$2
$1
$0
0
22
4 4
6 6
8
Quantity
Quantity
Supplied
Supplied
of Widgets
of Widgets
10
10
12
12
Changes in Supply
Changes in any of the factors other than price causes the
supply curve to shift either:
Decrease in Supply shifts to the Left (Less supplied at each
price)
OR
Increase in Supply shifts to the Right (More supplied at each
price)
Supply Practice
Cost to Produce
Cost of Resources
Rises
Productivity Decreases
Productivity Increases
New Technology
Higher Taxes
Lower Taxes
Government Pays
Subsidy
Amount of Supply
Price
S1
Quantity
Price
Quantity
Price
Quantity
Price
S1
Quantity
Price
Quantity
Price
6. Pago-Pagan workers are introduced to coffee as PagoPaga become integrated into the world market and their
productivity increases drastically.
S1
Quantity
Price
Quantity
chart.
Price per Widget ($)
Quantity Demanded
of Widget per day
Quantity Supplied
of Widget per day
$5
10
$4
$3
$2
$1
10
$5
$4
$3
Demand Curve
Supply Curve
$2
$1
$0
0
6
Quantity of Widgets
10
12
$6
Surplus
$5
$4
$3
Demand Curve
Supply Curve
$2
$1
$0
0
6
Quantity of Widgets
10
12
$6
$5
At $2, Quantity
demanded will be 8
Widgets.
At $2, there will be a
shortage of 4 Widgets.
$4
$3
Demand Curve
Supply Curve
$2
$1
Shortage
$0
0
10
12
Over time, a surplus forces the price down and a shortage forces
the price up until supply and demand are balanced.
The point where they achieve balance is the equilibrium price.
At this price, neither a surplus nor a shortage exists.
$6
$5
At $3, Quantity
demanded will be 6
Widgets.
$4
$3
Demand Curve
Supply Curve
$2
$1
$0
0
6
Quantity of Widgets
10
12
Surplus
$10
$8
$6
Demand
Supply
$4
$2
$0
0
6
Quantity of Boomerangs
10
12
$10
$8
$6
Demand
Supply
$4
$2
Shortage
$0
0
6
Quantity of Boomerangs
10
12
Market Equilibrium
$10
$8
$6
Demand
Supply
$4
$2
$0
0
6
Quantity of Boomerangs
10
12
$10
$8
Original Demand
$6
Supply
New Demand
$4
$2
$0
0
8
Quantity of Boomerangs
10
12
14
16
Price
P1
P2
D
D1
Q2
Q1
Quantity
Price
P2
P1
D1
D
Q1
Q2
Quantity
Price
P1
P2
D1
Q2
Q1
D
Quantity
Price
P1
P2
D1
Q2
Q1
D
Quantity
Price
P2
P1
D1
D
Q1
Q2
Quantity
Price
S1
S
P2
P1
D
Q2 Q1
Quantity
Price
S
S1
P1
P2
D
Q1
Q2
Quantity
Price
S1
P1
P2
D
Q1
Q2
Quantity
Price
S1
S
P2
P1
D
Q2
Q1
Quantity
Price
S
S1
P1
P2
D
Q1
Q2
Quantity
Price
S1
P1
D1
D
Q1
Q2
Quantity
12. The price of pink ties (a related good that most purple tie producers also
produce) rises as spring approaches. Tie consumers in Chapel Hill begin to
expect purple ties to be put on sale since spring is coming, so they put off
purchasing.
Price
S1
S
P1
D1
Q2
Q1
Quantity
Disequilibrium
Describes a market that is not in equilibrium:
the quantity supplied is not equal to the quantity
demanded at the actual price.
Elasticity
A measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price. Price
elasticity of demand is a term in economics often used when
discussing price sensitivity.
As with income, the effect that this has on the amount that one
is willing and able to buy depends on the type of good we're
talking about. Think about two goods that are typically
consumed together. For example, bagels and cream cheese. We
call these types of goods compliments. If the price of a bagel
goes up, the Law of Demand tells us that we will be
willing/able to buy fewer bagels. But if we want fewer bagels,
we will also want to use less cream cheese (since we typically
use them together). Therefore, an increase in the price of bagels
means we want to purchase less cream cheese. We can
summarize this by saying that when two goods are
complements, there is an inverse relationship between the price
of one good and the demand for the other good.
This is a less tangible item that still can have a big impact on
demand. There are all kinds of things that can change one's tastes
or preferences that cause people to want to buy more or less of a
product. For example, if a celebrity endorses a new product, this
may increase the demand for a product. On the other hand, if a
new health study comes out saying something is bad for your
health, this may decrease the demand for the product. Another
example is that a person may have a higher demand for an
umbrella on a rainy day than on a sunny day.
Production Cost
A cost incurred by a business when manufacturing a good or
producing a service. Production costs combine raw material
and labor. To figure out the cost of production per unit, the cost
of production is divided by the number of units produced. A
company that knows how much it will cost to produce an item,
or produce a service, will have a clearer picture of how to
better price the item or service and what will be the total cost
to the company.
Market supply
Supply is the quantity of a good or service that a producer is
willing and able to supply onto the market at a given price in a
given time period. Normally as the market price of a
commodity rises, producers will expand their supply onto the
market.
There are three main reasons why supply curves for most