Supply and Demand together at last!. SUPPLY and demand These two laws are directly contrary to each other. If suppliers want high prices, but buyers want.

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Presentation transcript:

Supply and Demand together at last!

SUPPLY and demand These two laws are directly contrary to each other. If suppliers want high prices, but buyers want low prices, how on earth does anything get traded? The point where: quantity supplied = quantity demanded supply demand

Supply and demand Market Equilibrium (aka market clearing price) The point at which sellers are willing to sell as much as buyers are willing to buy Qd=Qs EOC study guide Supply & Demand #4

Moving Toward Equilibrium Surplus is the condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above equilibrium. Shortage is the condition in which the quantity demanded of a good is greater than the quantity supplied. Shortage occur only at prices below equilibrium price. EOC study guide Supply & Demand #7

Supply and Demand Interactions Relationship of quantity suppliedMarket (Q s ) to quantity demanded (Q d )Condition Q s  Q d Surplus Q d  Q s Shortage Q d = Q s Equilibrium

Supply and demand Equilibrium or market clearing price How difficult is it to find this point? It is the single most difficult aspect of business All trial and error “In the Chips” Activity You will need a piece of paper and a pencil

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

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

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

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

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

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

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

What happens to price when there is a shortage? 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

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