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
AS Economics
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
Supply (S)
Demand (D)

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

8. Excess Demand – Market shortage
Supply (S)
Demand (D)
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
Supply (S)
Demand (D)
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
Supply P3
Equilibrium Point – a market clearing point where supply = demand P1 P2
Demand Q1
Quantity

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

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

13. & the impact on equilibrium
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 D1 P1 Q3 P3 D2 Q2
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….
A rise in the price for bread
An expected rise in the price of butter in the near future
A rise in the price of margarine
A tax on butter production
A rise in the demand for yoghurts
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
An Inward Shift in Demand and a fall in Supply
An Outward Shift in Demand and a Rise in Supply
Price
Price S2 S1 S1 S2 D3 D1 D1 D2
Quantity
Quantity

20. Equilibrium worksheet
Homework
Equilibrium worksheet

21. 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?