# Chapter 6: Equilibrium (Combining Demand and Supply)

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Chapter 6: Equilibrium (Combining Demand and Supply)

Review: Demand vs. Supply

Demand vs. Supply Consumers are willing and able to purchase Price and Quantity have an INVERSE relationship Negative Slope Curves Down and to Right Businesses are willing and able to sell Price and Quantity have a DIRECT relationship Positive Slope Curves Up and to Right

Movements: Movements: Demand vs. Supply Cause: Price (Ceteris Paribus) Called: Change in Quantity Demanded Cause: Price (Ceteris Paribus) Called: Change in Quantity Supplied

Shifts: Shifts: Demand vs. Supply Cause: Quantity (PYNTE) Called: Change in Demand Cause: Quantity (SPENT) Called: Change in Supply

Is this Demand or Supply? 1. PYNTE variables Demand 2. 3. SUPPLY Demand 4. Ceteris Paribus causes a movement Demand and SUPPLY 5. 6. SPENT variables SUPPLY

Demand Starting at point X 1.Increase in Quantity Demanded 2.Decrease in Quantity Demanded 3.Increase in Demand 4.Decrease in Demand Z Y S Y

Supply Starting at point X 1.Increase in Quantity Supplied 2.Decrease in Quantity Supplied 3.Increase in Supply 4.Decrease in Supply Y Z S Q

How much are you going to pay for that doggie in the window? Answer: The market price.

Doggie Example “The price will settle at the point where the number of dogs for sale exactly matches the number of dogs that consumers want to buy. If there are more potential pet owners than dogs available, then the price of dogs will go up. Some consumers will then decide to buy ferrets instead and some pet shops will offer more dogs for sale. Eventually, the supply of dogs will match the demand. Remarkably, some markets actually work this way. --Naked Economics, p. 15

Equilibrium  The point at which Demand and Supply are EQUAL at the SAME Price and Quantity  Example: Point F

What is Equilibrium? PriceQuantity Demanded Quantity Supplied \$151 \$242 \$333 \$424 \$515

Equilibrium PriceQuantity Demanded Quantity Supplied \$151 \$242 \$333 \$424 \$515

Equilibrium PriceQuantity Demanded Quantity Supplied \$151 \$242 \$333 \$424 \$515

What is the difference between… Equilibrium Price The Price at which Quantity Demanded and Quantity Supplied are EQUAL Example: \$3 Equilibrium Quantity The Quantity at which Quantity Demanded and Quantity Supplied are EQUAL Example: 3

Equilibrium Price Example: \$2 Equilibrium Quantity Example: 20

Disequilibrium  Any Price or Quantity NOT at equilibrium  Demand and Supply are NOT equal in the Market  Example: Points Y and X

7. Identify a) Equilibrium price has [increased / decreased] b) Equilibrium quantity has [increased / decreased]

7. Identify a) Equilibrium price has [increased / decreased] b) Equilibrium quantity has [increased / decreased]

Outcomes of Disequilibrium…  Excess Demand  Excess Supply

Excess Demand  Quantity Demanded is MORE than Quantity Supplied  AKA: Shortage

Excess Demand (Shortage) 1 2 3 4 5 6 Scenario: Betty wants 10 Candy Bars. The problem is that there is only 6 on the shelves 1 2 3 4 5 6 7 8 9 10 The Green represents TOO much DEMAND The Purple Represents NOT enough Supply

Excess Demand (Shortage) Real-Life Examples: Turkeys before Thanksgiving Elmo dolls before Christmas Eggs before Easter Flu shots during flu season California’s electricity shortage

Excess Demand (Shortage) What do you think will eventually happen to PRICE when there is a shortage?

Excess Demand (Shortage) What do you think will eventually happen to PRICE when there is a shortage? It will INCREASE

Excess Supply  Quantity Demanded is LESS than Quantity Supplied  AKA: Surplus

Excess Supply (Surplus) The Green represents NOT enough Demand The Purple Represents TOO much Supply Scenario: Betty went to the mall for 2 t-shirts. The store had 8 t-shirts. 1 2 3 4 5 6 7 8 1 2

Excess Supply (Surplus) Real-Life Examples: Christmas decorations after the Christmas Crops are in season—like apples in the fall or watermelon in the summer Companies thought a product would sell— but no one wants it

Excess Supply (Surplus) What do you think will eventually happen to PRICE when there is a surplus?

Excess Supply (Surplus) What do you think will eventually happen to PRICE when there is a surplus? It will DECREASE

Why would a deer cost \$43,000?

There are local farms that breed deer for the purpose of selling them— “deer farms” These deer farms grow deer for the sole purpose of selling them—mostly to people in Western states.

Why would a deer cost \$43,000? The buyers purchase deer to: Increase the amount of deer in Western woods (where hunters pay a certain amount of money each year to hunt in a particular area) For genetics—to reproduce and create “more superior” deer

Why would a deer cost \$43,000? When there is NOT a lot of genetically superior deer, the supply for deer decreases. Because many people want the deer, the number of demanders increases. As a result, the price of deer increases—to \$43,000!!!

Why would a deer cost \$43,000? Answer: Excess Demand (shortage)

Outcomes of Price Control…  Price Ceiling  Price Floor

Price Ceiling  The MAXIMUM Price that can be legally charged for a good or service  Example: Rent Control  Advantages: Keeps prices lower & affordable  Disadvantages: Reduces Quantity and Quality

Price Floor  The MINIMUM Price that can be legally charged for a good or service  Example: Minimum wage  Advantage:Creates a standard  Disadvantage:More unemployed because costs increase

Black Market Items sold illegally Examples: Babies, guns, drugs

Efficient Resource Allocation Distribute goods and services adequately

Role of Prices

Prices Advantages 1.Measure of value 2.Signal of how and what to produce 3.Flexibility 4.Costs nothing to administer 5.Wide choice of goods 6.Efficiency Disadvantages 1.People use the black market 2.Can cause shortages or surpluses 3.Can cause externalities (unintended economic side effects) 4.Consumers make ill- advised decisions

Which ones do they have in common? P: Price of Related Goods Y: Income N: Number of Demanders T: Taste E: Expectations S: Supplier Input Costs P: Price of Related Good E: Expectations N: Number of Suppliers T: Technology, Taxes, Tampering, Temperature Causes in Change in DemandCauses in Change in Supply

Also… The “N” variables are different—Demand: N: Number of DemandersSupply: N: Number of Suppliers The “T” variables are different—Demand: T: TasteSupply: T: There are 4 of them… none of which are TASTE!!!

Bails of Hay The price of hay is expected to increase. (From \$4 a bail now to \$ 10 a bail in the future) Is there a PYNTE variable? Is there a SPENT variable?

Bails of Hay The price of hay is expected to increase. (From \$4 a bail now to \$ 10 a bail in the future) Is there a PYNTE variable? YES Is there a SPENT variable? YES  What is the variable?

Bails of Hay The price of hay is expected to increase. (From \$4 a bail now to \$ 10 a bail in the future) What is the Variable? Expectations  What happens to the demand of bails of hay?  What happens to the supply of bails of hay?

Bails of Hay The price of hay is expected to increase. (From \$4 a bail now to \$ 10 a bail in the future) Expectations The demand for bails of hay INCREASES The supply for bails of hay DECREASES  Which direction does the demand curve and supply curve shift? Demand Now Demand Later Supply Now Supply Later P I Q IQ D Q I

Bails of Hay The price of hay is expected to increase. (From \$4 a bail now to \$ 10 a bail in the future) Expectations The demand for bails of hay INCREASES The supply for bails of hay DECREASES The demand curve shifts to the RIGHT The supply curve shifts to the LEFT  What happens to the equilibrium price of the bail of hay?

Bails of Hay The price of hay is expected to increase. (From \$4 a bail now to \$ 10 a bail in the future) Expectations The demand for bails of hay INCREASES The supply for bails of hay DECREASES The demand curve shifts to the RIGHT The supply curve shifts to the LEFT The equilibrium price of the bail of hay will INCREASE.

Wooden Desks The price of wood increases. Is there a PYNTE variable? Is there a SPENT variable?

Wooden Desks The price of wood increases. Is there a PYNTE variable? NO Is there a SPENT variable? YES  What is the SPENT variable?

Wooden Desks The price of wood increases. What is the SPENT variable it? S (supplier input costs)  What happens to the supply of wooden desks?

Wooden Desks The price of wood increases. S (supplier input costs) What happens to the supply of wooden desks? DECREASES  Which direction does the supply curve shift?

Wooden Desks The price of wood increases. S (supplier input costs) Supply of wooden desks DECREASES The supply curve shifts to the LEFT  What happens to the equilibrium price and equilibrium quantity of the desks?

Wooden Desks The price of wood increases. S (supplier input costs) Supply of wooden desks DECREASES The supply curve shifts to the LEFT The Equilibrium price (INCREASES) Equilibrium quantity (DECREASES)

“Help! Help! Here come the Bears” --Hair Bear Bunch Equilibrium Song

Figure out Demand, put it on the graph… bum, bum, bum Figure out Supply, put it on the graph… bum, bum, bum

Standards 6.2.12EF 6.3.12DEF 6.4.12DE 6.5.12ABDF