1. Chapter 3: Supply and Demand Part 2 Econ 101: Microeconomics

2. Equilibrium: Putting Supply and Demand Together When a market is in equilibrium Both price of good and quantity bought and sold have settled into a state of rest Equilibrium price, p*, is a “Market clearing” price: Price at which quantity supplied ________________ quantity demanded. This quantity is called the Equilibrium quantity, Q*. The equilibrium price and equilibrium quantity can be found on the _________ and _________ axes, respectively At point where supply and demand curves cross

3. Market Equilibrium E P* Demand Supply Q* Equilibrium price (p*) : the price that “balances” quantity supplied and quantity demanded. Quantity Price Equilibrium

4. Excess Demand E H J D S p* Excess Demand Quantity Price p1p1 Q1Q1 Q2Q2 Suppose price starts out below the equilibrium level: Disappointed demanders will bid up the price, driving price up toward equilibrium. Q*

5. Excess Demand Excess demand At a given price, the excess of quantity demanded over quantity supplied Price of the good will rise as buyers compete with each other to get more of the good than is available

6. Excess Supply K L E D S Quantity Price p* Q1Q1 Q2Q2 Q* Suppose price starts out above the equilibrium level: Disappointed supplier will undercut rivals’ prices, driving price down toward equilibrium. p1p1

7. Excess Supply At a given price, the excess of quantity supplied over quantity demanded Price of the good will fall as sellers compete with each other to sell more of the good than buyers want

8. Income Rises: What Happens When Things Change Income rises, causing ___________ in demand __________ shift in the demand curve causes _________ movement along the supply curve Equilibrium price and equilibrium quantity both _________ Shift of one curve causes a movement along the other curve to new equilibrium point

9. Increase in Income 1.An increase in demand... E F' 3.00 D1D1 D2D2 S $4.00 50,00060,000 3.to a new equilibrium. 5.and equilibrium quantity increases too. 2.moves us along the supply curve... Number of Bottles of Maple Syrup per Period Price per Bottle 4.Equilibrium price increases

10. An Ice Storm Hits: What Happens When Things Change An ice storm causes _________ in _______ Weather is _________ variable for _______ curve Any change that shifts the supply curve leftward in a market will increase the equilibrium price And decrease the equilibrium quantity in that market

11. A Shift of Supply and A New Equilibrium E' E3.00 D $5.00 50,00035,000 S2S2 S1S1 Number of Bottles Price per Bottle

12. Changes in the Market for Handheld PCs 1.An increase in supply... 2.and a decrease in demand... 5. and quantity decreased as well. A B $400 D 2003 S 2002 S 2003 D 2002 $500 2.453.33 Millions of Handheld PCs per Quarter Price per Handheld PC 4.Price decreased... 3.moved the market to a new equilibrium.

13. Both Curves Shift When just one curve shifts (and we know the direction of the shift) we can determine the direction ___________________________ ____________________ When both curves shift (and we know the direction of the shifts) we can determine the direction ____________________________ ______________________ Direction of the other will depend on which curve shifts by more

14. The Three Step Process Key Step 1—Characterize the Market Decide which market or markets best suit problem being analyzed and identify decision makers (buyers and sellers) who interact there Key Step 2—Find the Equilibrium Describe conditions necessary for equilibrium in the market, and a method for determining that equilibrium Key Step 3—What Happens When Things Change Explore how events or government polices change market equilibrium

15. Using Supply and Demand: The Invasion of Kuwait Why did Iraq’s invasion of Kuwait cause the price of oil to rise? Immediately after the invasion, United States led a worldwide embargo on oil from both Iraq and Kuwait A significant decrease in the oil industry’s productive capacity caused a shift in the supply curve to the left Price of oil increased

16. The Market For Oil P2P2 D E' P1P1 E Q2Q2 Q1Q1 S2S2 S1S1 Barrels of Oil Price per Barrel of Oil

17. Using Supply and Demand: The Invasion of Kuwait Why did the price of natural gas rise as well? Oil is a substitute for natural gas Rise in the price of a substitute increases demand for a good Rise in price of oil caused demand curve for natural gas to shift to the right Thus, the price of natural gas rose

18. The Market For Natural Gas Cubic Feet of Natural Gas Price per Cubic Foot of Natural Gas P4P4 P3P3 F Q3Q3 Q4Q4 S D2D2 F' D1D1