Online Notes Equilibrium, Changes in Supply and Demand, and Price Ceiling and Floors

Online Notes: Equilibrium, Changes in Supply and Demand, and Price Ceiling and Floors

Equilibrium

Supply and demand come together in the marketplace.  With a downward-sloping demand curve and an upward-sloping supply curve, there will ordinarily be a point of intersection of the two curves.  That point shows the price at which the quantity demanded in the market equals the quantity supplied.  This is called an equilibrium point. and the corresponding price is the equilibrium price while the corresponding quantity is the equilibrium quantityAt equilibrium, there is no tendency for price or quantity to change.

Consider now prices below the equilibrium price.  The quantity demanded will be greater than the quantity supplied.  This is referred to as excess demand. or a shortage .  In the face of a shortage, consumers will compete with one another for the limited supply, and this will result in an increase in the price of the product.  The increase in price will stimulate a reduction in quantity demanded and an increase in quantity supplied (movements up along the demand curve and the supply curve) until the equilibrium point is reached.  Conversely, at prices above the equilibrium price, quantity demanded will be smaller than the quantity supplied, and there will be excess supply (a surplus ) in the market.  With a surplus, firms will compete to sell their products, and this will result in downward pressure on the price of the product.  As with a shortage, there will be movements along the supply and demand curves as price changes, until the equilibrium point is reached.

Changes in Supply and Demand

When supply and demand curves shift, this results in changes to the equilibrium price and quantity.  For example, if there is an increase in demand (a shift to the right of the demand curve, as might occur with higher incomes, higher prices for a substitute good, or stronger tastes for the product in question), both the equilibrium price and equilibrium quantity will increase.  A decrease in demand will entail reductions in the equilibrium price and quantity.  If there is an increase in supply (a shift to the right of the supply curve, as might occur with improved technology or reduction in the prices of inputs), this will result in a decline in the equilibrium price and an increase in the equilibrium quantity.  Conversely, a decrease in supply will raise the equilibrium price and lower the equilibrium quantity.

You can see these changes by starting with a simple supply and demand graph showing an initial equilibrium, and then drawing the new demand or supply curve and observing the new equilibrium point.  In order to do well in this course, you will need to become proficient at drawing supply and demand graphs and using them to determine the consequences of changes in demand, supply, or both.

The four basic changes (increase in demand, decline in demand, increase in supply, reduction in supply) are illustrated in the diagrams below.  Note that in each case, there is a movement along the curve for the aspect that does not change.  That is, when demand increases, there is an increase in the quantity supplied (movement along the supply curve) as the market moves from the initial equilibrium price to the new equilibrium price.   Likewise, when there is an increase in supply, there is an increase in the quantity demanded (downward movement along the demand curve).

1. An increase in demand

Online Notes: Equilibrium, Changes in Supply and Demand, and Price Ceiling and Floors

Equilibrium

Supply and demand come together in the marketplace.  With a downward-sloping demand curve and an upward-sloping supply curve, there will ordinarily be a point of intersection of the two curves.  That point shows the price at which the quantity demanded in the market equals the quantity supplied.  This is called an equilibrium point. and the corresponding price is the equilibrium price while the corresponding quantity is the equilibrium quantityAt equilibrium, there is no tendency for price or quantity to change.

Online Notes Equilibrium, Changes in Supply and Demand, and Price Ceiling and Floors

Consider now prices below the equilibrium price.  The quantity demanded will be greater than the quantity supplied.  This is referred to as excess demand. or a shortage .  In the face of a shortage, consumers will compete with one another for the limited supply, and this will result in an increase in the price of the product.  The increase in price will stimulate a reduction in quantity demanded and an increase in quantity supplied (movements up along the demand curve and the supply curve) until the equilibrium point is reached.  Conversely, at prices above the equilibrium price, quantity demanded will be smaller than the quantity supplied, and there will be excess supply (a surplus ) in the market.  With a surplus, firms will compete to sell their products, and this will result in downward pressure on the price of the product.  As with a shortage, there will be movements along the supply and demand curves as price changes, until the equilibrium point is reached.

Changes in Supply and Demand

When supply and demand curves shift, this results in changes to the equilibrium price and quantity.  For example, if there is an increase in demand (a shift to the right of the demand curve, as might occur with higher incomes, higher prices for a substitute good, or stronger tastes for the product in question), both the equilibrium price and equilibrium quantity will increase.  A decrease in demand will entail reductions in the equilibrium price and quantity.  If there is an increase in supply (a shift to the right of the supply curve, as might occur with improved technology or reduction in the prices of inputs), this will result in a decline in the equilibrium price and an increase in the equilibrium quantity.  Conversely, a decrease in supply will raise the equilibrium price and lower the equilibrium quantity.

You can see these changes by starting with a simple supply and demand graph showing an initial equilibrium, and then drawing the new demand or supply curve and observing the new equilibrium point.  In order to do well in this course, you will need to become proficient at drawing supply and demand graphs and using them to determine the consequences of changes in demand, supply, or both.

The four basic changes (increase in demand, decline in demand, increase in supply, reduction in supply) are illustrated in the diagrams below.  Note that in each case, there is a movement along the curve for the aspect that does not change.  That is, when demand increases, there is an increase in the quantity supplied (movement along the supply curve) as the market moves from the initial equilibrium price to the new equilibrium price.   Likewise, when there is an increase in supply, there is an increase in the quantity demanded (downward movement along the demand curve).

1. An increase in demand


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