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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 2
Module 7

4. What You Will Learn in this Module
Explain how supply and demand curves determine a market’s equilibrium price and equilibrium quantity
Describe how price moves the market back to equilibrium in the case of a shortage or surplus
Explain how equilibrium price and quantity are affected when there is a change in either supply or demand
Explain how equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand
What You Will Learn in this Module
Section 2 | Module 7

5. Supply, Demand and Equilibrium
Equilibrium in a competitive market: when the quantity demanded of a good equals the quantity supplied of that good.
The price at which this takes place is the equilibrium price (a.k.a. market-clearing price):
Every buyer finds a seller and vice versa.
The quantity of the good bought and sold at that price is the equilibrium quantity.
Section 2 | Module 7

6. Finding the Equilibrium Price and Quantity
Price of cotton
(per pound)
Market equilibrium occurs at point E, where the supply curve and the demand curve intersect.
Supply
$2.00
1.75
1.50
1.25
Equilibrium price
1.00 E
Equilibrium
0.75
0.50
Demand 7 10 13 15 17
Quantity of cotton
(billions of pounds)
Equilibrium quantity
Section 2 | Module 7

7. Price Above Its Equilibrium Level Creates a Surplus
Price of cotton
(per pound)
There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.
Supply
$2.00
Surplus
1.75
1.50
1.25
1.00 E
0.75
0.50
Demand 7
8.1 10
11.2 13 15 17
Quantity of cotton (billions of pounds)
Quantity demanded
Quantity supplied
Section 2 | Module 7

8. Price Below Its Equilibrium Level Creates a Shortage
Price of cotton
(per pound)
There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
Supply
$2.00
1.75
1.50
1.25
1.00 E
0.75
Shortage
0.50
Demand 7
9.1 10
11.5 13 15 17
Quantity of cotton (billions of pounds)
Quantity supplied
Quantity demanded
Section 2 | Module 7

9. F Y I The Price of Admission
The competitive market model determines the price you pay for concert tickets.
Section 2 | Module 7

10. Equilibrium and Shifts of the Demand Curve
Price
of cotton
An increase in demand…
Supply
… leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity. E 2 P 2
Price rises E 1 P 1 D 2 D 1 Q Q 1 2
Quantity of cotton
Section 2 | Module 7

11. Equilibrium and Shifts of the Supply Curve
Price of
cotton S S
A decrease in supply… 2 1 E P 2 2
… leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity.
Price rises P E 1 1
Demand Q Q
Quantity of cotton 2 1
Quantity falls
Section 2 | Module 7

12. (a) One possible outcome: Price Rises, Quantity Rises
Simultaneous Shifts of Supply and Demand Curves
(a) One possible outcome: Price Rises, Quantity Rises
Price of cotton
Small decrease
in supply S S 2 1
Two opposing forces determining the equilibrium quantity. E
The increase in demand dominates the decrease in supply. 2 P 2 E 1 P 1 D 2 D 1
Large increase
in demand Q
Quantity of cotton 1 Q 2
Section 2 | Module 7

13. (b) Another Possibility Outcome: Price Rises, Quantity Falls
Simultaneous Shifts of Supply and Demand Curves
(b) Another Possibility Outcome: Price Rises, Quantity Falls
Price of cotton
Two opposing forces determining the equilibrium quantity.
Large decrease in supply S 2 S 1 E 2 P 2 E
Small increase in demand 1 P 1 D 2 D 1
Quantity of cotton
Section 2 | Module 7 Q Q

14. F Y I
Makin’ Bacon?
A decrease in the supply of bacon may cause consumers to squeal, but it won’t cause a lasting shortage, because higher bacon prices will decrease the quantity demanded and increase the quantity supplied.
Section 2 | Module 7

15. Simultaneous Shifts of Supply and Demand
Summary
Simultaneous Shifts of Supply and Demand
Supply Increases
Supply Decreases
Demand Increases
Price: cannot be determined
Quantity: up
Price: up
Quantity: cannot be determined
Demand Decreases
Price: down
Quantity: down
Section 2 | Module 7

16. Summary
The equilibrium price, or market-clearing price, is the price at which the quantity demanded is equal to the quantity supplied.
When quantity supplied is equal to quantity demanded, this is the equilibrium quantity.
When the price is above its market-clearing level, there is a surplus that pushes the price down.
When the price is below its market-clearing level, there is a shortage that pushes the price up.
Section 2 | Module 7