1. Equilibrium Market Prices How the interaction of demand and supply determines equilibrium prices in a market economy

2. Aims of today To reinforce factors that cause a movement & a shift in Demand & Supply curves To introduce the theory of equilibrium To develop skills in drawing D & S diagrams!

3. The concept of market equilibrium Equilibrium means a state of equality between demand and supply Without a shift in demand and/or supply there will be no change in market price Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market

4. Demand and Supply Schedules for Oil At what point is the market in Equilibrium? What is the market situation … at $20? What is the market situation … At $8?

5. Demand and Supply Schedules for Oil

6. The Market Equilibrium Demand (D) Supply (S) Equilibrium

7. Is there such a thing as too much or too little? It’s all in excess!

8. Excess Demand – Market shortage Demand (D) Supply (S) When market price is lower than the market equilibrium, demand exceeds supply (a market shortage) There is therefore upward pressure on market price

9. Excess Supply – market surplus Demand (D) Supply (S) When market price is higher than the market equilibrium, supply exceeds demand (a market surplus) There is therefore downward pressure on the market price

10. The equilibrium in a market Price Quantity Demand Supply P1 Q1 Equilibrium Point – a market clearing point where supply = demand P2 P3

11. Shifts in Demand & impact on equilibrium….. Using your whiteboard Draw an Equilibrium diagram What is the effect of an inward shift in Demand?

12. Changes in market demand Price Quantity D1 Supply P1 Q2 Price Quantity D1 Suppl y P1 Q1 D3 Q3 P3 D2 Q1 P2 An Outward Shift in DemandAn Inward Shift in Demand

13. Shifts in Supply & the impact on equilibrium

14. Changes in market supply The supply curve may shift outwards if there is A fall in the costs of production (e.g. a fall in labour or raw material costs) A government subsidy to producers that reduces their costs for each unit supplied Favourable climatic conditions causing higher than yields for agricultural commodities A fall in the price of a substitute in production An improvement in production technology leading to higher productivity and efficiency in the production process The entry of new suppliers (firms) into the market which leads to an increase in total market supply available to consumers

15. Changes in market supply Price Quantity S1 Q1 Price Quantity D1 S1 P1 Q1 Q3 P3 D2 Q2 P1 An Outward Shift in Supply An Inward Shift in Supply S2 P2 S3

16. Your go…..

17. Draw an Equilibrium diagram - and then show… What will happen to equilibrium price and quantity of butter in each of the following cases? You should SHOW whether demand or supply (or both) have shifted and in which direction…. 1.A rise in the price for bread 2.An expected rise in the price of butter in the near future 3.A rise in the price of margarine 4.A tax on butter production 5.A rise in the demand for yoghurts 6.The invention of a new but expensive process for removing all cholesterol from butter plus the passing of a law which states that all butter producers must use this process.

18. So… what happens if both Demand & Supply shift? ….we’ll look into this further next lesson!

19. Shifts in market demand and market supply Price Quantity D1 S1 Price Quantity D1 S1 D3 D2 An Outward Shift in Demand and a Rise in Supply An Inward Shift in Demand and a fall in Supply S2

20. Plenary Identify 3 factors that could be the cause of a shift in demand for chocolate! Identify 3 factors that could shift the supply of coffee. Can anyone explain in words the concept of equilibrium?