macroeconomics 231. topic #3 supply and demand market equilibrium equilibrium in a market occurs...

MACROECONOMICS

231

TOPIC #3

SUPPLY

and

DEMAND

Market Equilibrium

Equilibrium in a market occurs when the price balances the plans of buyers and sellers.

Equilibrium price is the price at which quantity demanded equals quantity supplied.

Equilibrium quantity is the quantity bought and sold at the equilibrium price.

Market Equilibrium

Price as a Regulator– If the price is too low, quantity demanded

exceeds quantity supplied.– If the price is too high, quantity supplied

exceeds quantity demanded.

Market Equilibrium

Quantity Quantity Shortage(–)Price demanded supplied or surplus(+)(dollars

per tape) (millions of tapes per week)

1 9 0

2 6 3

3 4 4

4 3 5

5 2 6

Market Equilibrium

Quantity Quantity Shortage(–)Price demanded supplied or surplus(+)(dollars

per tape) (millions of tapes per week)

1 9 0 –9

2 6 3 –3

3 4 4 0

4 3 5 +2

5 2 6 +4

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pri

ce (

doll

ar p

er ta

pe)

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pri

ce (

doll

ar p

er ta

pe)

Demand for tapes

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pri

ce (

doll

ar p

er ta

pe)

Supply of Tapes

Demand for tapes

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pri

ce (

doll

ar p

er ta

pe)

Supply of Tapes

Demand for tapes

Equilibrium

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pri

ce (

doll

ar p

er ta

pe)

Supply of Tapes

Surplus of2 million tapesat $4 a tape

Demand for tapes

Equilibrium

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pri

ce (

doll

ar p

er ta

pe)

Supply of Tapes

Surplus of2 million tapesat $4 a tape

Shortage of 3 million tapes at $2 a tape

Demand for tapes

Equilibrium

Market Equilibrium

Price Adjustments– A shortage forces the price up.– A surplus forces the price down.

Such price changes are mutually beneficial to both buyers and sellers.

Predicting Changes in Price and Quantity

A Change in Demand– What would happen to the price and quantity of

tapes if the price of a Walkman falls from $200 to $50.

The Effects of a Change in Demand

Quantity demanded Price (millions of tapes per week)(dollars Quantity suppliedper tape ) Walkman $200 Walkman $50 (millions of tapes per week)

1 9 0

2 6 3

3 4 4

4 3 5

5 2 6

The Effects of a Change in Demand

Quantity demanded Price (millions of tapes per week)(dollars Quantity suppliedper tape ) Walkman $200 Walkman $50 (millions of tapes per week)

1 9 13 0

2 6 10 3

3 4 8 4

4 3 7 5

5 2 6 6

The Effects of a Change in Demand

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes

Demand for tapes(Walkman $200)

The Effects of a Change in Demand

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

The Effects of a Change in Demand

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

A Change in Demand

Prediction– When demand increases, both the price and

quantity increase.– When demand decreases, both the price and

quantity decrease.

Predicting Changes in Price and Quantity

A Change in Supply– What would happen to the price and quantity

of tapes if a new cost-saving production technology was developed?

The Effects of a Change in Supply

Quantity supplied Price (millions of tapes per week)

(dollars Quantity demanded old new

per tape ) (millions of tapes per week) technology technology

1 9 0

2 6 3

3 4 4

4 3 5

5 2 6

The Effects of a Change in Supply

Quantity supplied Price (millions of tapes per week)

(dollars Quantity demanded old new

per tape ) (millions of tapes per week) technology technology

1 9 0 3

2 6 3 6

3 4 4 8

4 3 5 10

5 2 6 12

The Effects of a Change in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)

Demand for tapes

Supply of tapes(old technology)

The Effects of a Change in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes

Supply of tapes(new technology)

The Effects of a Change in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes

Supply of tapes(new technology)

A Change in Supply

Prediction– When supply increases, the quantity increases

and the price falls.– When supply decreases, the quantity decreases

and the price rises

Predicting Changes in Price and Quantity

A Change in Both Demand and Supply– What would happen if both demand and supply

change together?

The Effects of an Increase in Both Demand and Supply

Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week)

Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied

per tape ) Walkman old Walkman new $200 technology $50 technology

1 9 0

2 6 3

3 4 4

4 3 5

5 2 6

The Effects of an Increase in Both Demand and Supply

Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week)

Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied

per tape ) Walkman old Walkman new $200 technology $50 technology

1 9 0 13 3

2 6 3 10 6

3 4 4 8 8

4 3 5 7 10

5 2 6 6 12

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(Walkman $200)

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

Supply of tapes(new technology)

A Change in Both Demand and Supply

Prediction– When both demand and supply increase, the

quantity increases and the price decreases, or remains constant.

– When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.

The Effects of an Decrease in Demand and an Increase in Supply

Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week)

Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied

per tape ) CD player old CD player new $400 technology $200 technology

1 13 0

2 10 3

3 8 4

4 7 5

5 6 6

The Effects of an Decrease in Demand and an Increase in Supply

Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week)

Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded supplied

per tape ) CD player old CD player new $400 technology $200 technology

1 13 0 9 3

2 10 3 6 6

3 8 4 4 8

4 7 5 3 10

5 6 6 2 12

The Effects of an Decrease in Demand and an Increase in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(CD player $400)

The Effects of an Decrease in Demand and an Increase in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(CD player $400)

Demand for tapes(CD player $400)

The Effects of an Decrease in Demand and an Increase in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6P

rice

(do

llar

per

tape

)Supply of tapes(old technology)

Demand for tapes(CD player $400)

Demand for tapes(CD player $400)

Supply of tapes(new technology)

The Effects of a Decrease in Demand and an Increase in Supply

Prediction– When demand decreases and supply increases,

the price falls and the quantity increases, decreases, or remains constant.

– When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.