1. Part II

2. Surplus (a.k.a. excess supply):
Surplus (a.k.a. excess supply):
when quantity supplied is greater than quantity demanded P Q
Example: If P = $5, S D
Surplus
then QD = 9 lattes
and QS = 25 lattes
resulting in a surplus of 16 lattes 2

3. Surplus (a.k.a. excess supply):P Q
Facing a surplus, sellers try to increase sales by cutting price. S D
Surplus
This causes QD to rise
and QS to fall…
…which reduces the surplus. 3

4. Surplus (a.k.a. excess supply):P Q
Facing a surplus, sellers try to increase sales by cutting price. S D
Surplus
This causes QD to rise and QS to fall.
Prices continue to fall until market reaches equilibrium. 4

5. What happens to price when there is a surplus?
Suppliers cannot sell all of their goods
Inventory grows
Expensive to store
What happens to price?
It lowers to the equilibrium price

6. Shortage (a.k.a. excess demand):
Shortage (a.k.a. excess demand):
when quantity demanded is greater than quantity supplied P Q
Example: If P = $1, S D
then QD = 21 lattes
and QS = 5 lattes
resulting in a shortage of 16 lattes
Shortage 6

7. Shortage (a.k.a. excess demand):P Q
Facing a shortage, sellers raise the price, S D
causing QD to fall
and QS to rise,
…which reduces the shortage.
Shortage 7

8. Shortage (a.k.a. excess demand):P Q
Facing a shortage, sellers raise the price, S D
causing QD to fall
and QS to rise.
Prices continue to rise until market reaches equilibrium.
Shortage 8

9. What happens to price when there is a shortage?
Price is below equilibrium causing a high demand for the good and a low supply
Buyers will pay higher prices for goods
Higher prices motivate suppliers to produce more
Price will rise until it reaches equilibrium

11. How do shortages and surpluses effect equilibrium price and quantity?
You will need to be able to analyze a shift and explain whether Ep and Eq increased or decreased
See examples on the next few slides

13. Supply: Increase Supply: No Change Demand: No Change Demand: DecreaseEp Eq Ep Eq

14. Example of a Double Shift
Supply: Decrease Demand: Increase S2 S1 E2 E1 Ep Eq D2
Indeterminate D1