Chapter 6

 Why does the market tend towards equilibrium?  Excess demand leads firms to raise prices, higher prices induce the quantity supplied to rise & the quantity demanded to fall until the two are equal

 Excess supply will force firms to cut prices & falling prices cause quantity demanded to rise & quantity supplied to fall until they are equal

Changes in Price  Shifts in the supply curve caused by advances in technology, new government taxes & subsidies, & changes in the price of raw materials & labor  Shift in the supply curve will change the equilibrium price & quantity

Understanding a Shift in Supply  As firms develop better technology for producing a good, the price falls

Finding a New Equilibrium  Lower costs shift the supply curve to the right where at each price, producers are willing to supply a larger quantity  Surplus- when quantity supplied exceeds quantity demanded

Changing Equilibrium  Not usually an unchanging, single point on a graph  Follows the intersection of the demand & supply curves as that point moves downward along the demand curve

A Fall in Supply  When the supply curves shifts to the left, the equilibrium price & quantity sold will change as well  As the supply curve shifts to the left, suppliers raise their prices & the quantity demanded falls

 New equilibrium price will be above & to the left of the original  Market price higher, quantity sold is lower

Shifts in Demand  The problem of excess demand  Fad causes a sudden increase in market demand, & demand curve shifts to the right  Leads to excess demand (shortage)  Appears as empty shelves & long lines

 Leads to search costs  What are search costs?  Available products must be rationed

Return to Equilibrium  As time passes, firms will raise prices  Eventually price equals quantity demanded

A Fall in Demand  What causes a fall in demand?  Excess demand turns into excess supply  Demand curve shifts to the left & prices cut

$800 $600 $400 $200 0 Price Output (in millions) Graph A: A Change in Supply Analyzing Shifts in Supply & Demand  Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand. Original supply Demand a New supply b c Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $ Price Supply Original demand a New demand c b