Demand & Supply Equilibrium.finaL 2011

8/3/2019 Demand & Supply Equilibrium.finaL 2011

1/32

Equilibrium Price


2/32

DEMAND AND SUPPLY AND

EQUILIBRIUM PRICE

Equilibrium price and output:

Equilibrium means that forces working on avariable are in balance so that there is notendency for it to change; here it means pricesof goods and the quantities exchanged betweenbuyers and sellers. This will be achieved whenquantity demanded equals quantity supplied


3/32


EQUILIBRIUM PRICE

response to shortages and surpluses

shortage (D > S)

price rises

surplus (S > D)

price falls

equilibrium

D = S

price is stable


4/32

SUPPLY ANDDEMAND TOGETHER

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.


5/32


EQUILIBRIUM PRICE

Characteristics of the equilibrium or market

clearing price:

QD =QS

No shortage

No excess supplyNo pressure on the price to change


6/32

Equilibrium price and output:The Market Demand and Supply of Potatoes

(Monthly)

Equilibrium price and output:The Market Demand and Supply of Potatoes

(Monthly)

Price of Potatoes(Rs per kg)

Total Market Demand(Tonnes: 000s)

Total Market Supply(Tonnes: 000s)

20 700 (A) 100 (a)

40 500 (B) 200 (b)

60 350 (C) 350 (c)

80 200 (D) 530 (d)

100 100 (E) 700 (e)


7/32

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

E

D

C

B

Aa

b

c

d

e

Supply

Demand

Price(Rsp

erkg)

SHORTAGE

(300 000)

The determination of market equilibrium(potatoes: monthly)


(a) Excess Demand


8/32

Equilibrium

Shortage

When price < equilibrium price, then

quantity demanded > the quantity supplied.

There is excess demand or a shortage.

Suppliers will raise the price due to too many

buyers chasing too few goods, thereby moving

toward equilibrium.


9/32

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

C

B

Aa

b

c

e

Supply

Demand

Price(Rsp

erkg)

D dSURPLUS

(330 000)



(b) Excess Supply


10/32


11/32

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

D d

Qe


E

B

Aa

b

e

Supply

Demand

Price(Rsp

erkg)




12/32

P

QO

Pe1

Qe1

S

g h

D1

D2

Pe2

Qe2

i

Effect of a shift in the demand curveEffect of a shift in the demand curve


13/32

P

QO

Pe1

Pe3

Qe3Qe1

D

S1

S2

j g

k

Effect of a shift in the supply curveEffect of a shift in the supply curve


14/32

Figure The Equilibrium ofSupply and Demand

Price ofIce-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

13

Equilibriumquantity

Equilibrium price Equilibrium

Supply

Demand

Rs2.00


15/32

Figure How an Increase in Demand Affects the Equilibrium

Price of

Ice-CreamCone

0 Quantity ofIce-Cream Cones

Supply

Initialequilibrium

D

D

3. . . . and a higher

quantity sold.

2. . . . resultingin a higherprice . . .

1. Hot weather increasesthe demand for ice cream . . .

2.00

7

New equilibriumRs2.50

10


16/32

Figure How a Decrease in Supply Affects the Equilibrium

Price of

Ice-CreamCone

0 Quantity ofIce-Cream Cones

Demand

Newequilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higher

price of icecream . . .

1. An increase in theprice of sugar reducesthe supply of ice cream. . .

3. . . . and a lower

quantity sold.

2.00

7

Rs2.50

4


17/32

What Happens to Price and Quantity When Supply orDemand

Shifts?


18/32

Food for thought ....

The Effect on the Market for Tennis Balls of a Decline in Court Rental

Fees

Effect on the Market forOvernight LetterDelivery of a Decline in the

Price of Internet Access

The Effect of a Pay Raise on the Rent for Apartments in Delhi

The Effect of the Release of Jurassic Park on the Market for Toy

Dinosaurs

The Effect of a Credible Rumor on the Market for Apple Computers

The Effect of the Increase in the Population of Potential Buyers

The Effect on the Skateboard Market of an Increase in the Price ofFiberglass

The Effect on the Market forNew Houses of a Decline in Carpenters

Wage Rates


19/32

The Effect on the Market for Tennis

Balls of a Decline in Court Rental Fees

Price

(Rs/ball)

Quantity

1.00

S

D

40

D

1.40

58


20/32

Effect on the Market forOvernight LetterDelivery

of a Decline in the Price of Internet Access

Price

(Rs/letter)

Quantity

(letters/month)

P

P

Q Q

S

D

D


21/32

The Effect of a Pay Raise on the Rent for

Apartments in Delhi

Rent

(Rs per month)

apartments

(units per month)

D

P

Q

S

P

Q

D


22/32

The Effect of the Release of Jurassic

Park on the Market for Toy Dinosaurs

Price

Toy Dinosaurs

(units per month)

P

Q

D

S

D

P

Q

D = demand after release of movie


23/32

The Effect of a Credible Rumor on

the Market for Apple Computers

Price

Apple Computers

(units per month)

P

Q

S

D

P

Q

D

D= demand after rumor of cheaper modelsoon to be released


24/32

The Effect of the Increase in

the Population of Potential Buyers

Price

Housing

(units per month)

P

Q

S

D

P

Q

D

D= demand after increase in population


25/32

The Effect on the Skateboard Market

of an Increase in the Price ofFiberglass

Price

(Rs/skateboard)

Quantity

(skateboards/month)

60

1000

S

D

80

800

S


26/32

The Effect on the Market forNew Houses

of a Decline in Carpenters Wage Rates

Price

(Rs1000/house)

Quantity

(houses/month)

1210

40

D

S

50

S


27/32

Quantity (millions of hours)

Demand, Supply, and Market Price

for Internet Time

1.55

1.50

1.45

1.40

1.35

1.30

1.25

1.20

1.15

1.10

1.05

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Priceper

Ho

ur

SupplyDemand

EE

At a price of Rs1.20, 6

million hours of internet

time will be offered for sale

and an equal amount

purchased


28/32

Quantity (millions of

Surplus of Internet Time

1.55

1.50

1.45

1.40

1.35

1.30

1.25

1.20

1.15

1.10

1.05

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Priceper

Hour

SupplyDemand

E

Surplus

At a price of Rs1.30, 7.8 million hours will be offered

for sale but consumers are only willing to purchase

4.2 million

Rather than hold on to

these hours sellers will offer

to sell at lower prices with

the result that more

consumers enter the

market price movestoward Rs1.20

hours Qs > Qd

surplus of internet hours


29/32

Quantity (millions of hours)

Shortage of Internet Time

$1.55

1.50

1.45

1.40

1.35

1.30

1.25

1.20

1.15

1.10

1.05

0 1 2 3 4 5 6 7 8 9 10 11 12 13

PriceperH

our

E

Shortage

At a price of Rs1.10, buyers want to buy 8.5 million hours

but sellers are willing to offer only 3.6 million hours Qd>Q

Some buyers will be

willing to pay more with

the result that the price

will increase and sellers

will increase the amount

they offer for sale movetoward Rs1.20

shortage


30/32

Equilibrium Price & Output Determination

What will happen to the equilibrium price & quantity of butterin each of the following cases?

State whether the demand & supply or both have actually

shifted & in which direction?

a. a rise in the price of margarine a rise in demand for curd

a rise in price of bread

a rise in demand for bread

an expected rise in the price of butter in future a tax on butter production

the invention of a new but expensive process for removing all

cholesterol from butter plus the passing of a law which states

that all butter producers must use this process


31/32

House Prices: A case study in shifting

demand curves

Findoutwhathas happenedto house

prices overthepastthreeyears.Attemptanexplanation of whathas

happened


32/32

Case study

Adjusting to Oil Price Shocks

Short run & long run demand & supply

responses

Demand & Supply Equilibrium.finaL 2011

Documents

Transcript of Demand & Supply Equilibrium.finaL 2011