1. Supply and Demand Overheads

2. Equilibrium Equilibrium is defined a state of rest; a situation that, one achieved, will not change, unless some external factor, previously held constant, changes.

3. Market Equilibrium are equal. A market is said to be in equilibrium if the price in the market is such that the quantity supplied (Q S ) in the market and the quantity demanded (Q D ) in the market

4. Demand and Supply of Hamburger Patties 0 0.5 1 1.5 2 2.5 3 3.5 020004000600080001000012000 Quantity Price D0D0 S0S0S0S0 Supply = Demand 3333.33 6666.66

5. Quantity Price (per lb) supplieddemanded 0.310009800 0.6020008600 0.90 3000 7400 1.20 40006200 1.50 50005000 1.80 60003800 2.10 70002600 2.40 80001400 2.50 9000200

6. At a given price, the excess of the quantity supplied over the quantity demand is called the excess supply. Excess supply and excess demand Excess supply Excess supply = Q S (P) - Q D (P)

7. Quantity Price (per lb) supplieddemanded 0.310009800 0.6020008600 0.90 3000 7400 1.20 40006200 1.50 50005000 1.80 60003800 2.10 70002600 2.40 80001400 2.50 9000200 At a price of $2.10, excess supply (Q S (P) - Q D (P) ) is given by 7,000 - 2,600 = 4,400

8. Quantity Price (per lb) supplieddemanded 0.310009800 0.6020008600 0.90 3000 7400 1.20 40006200 1.50 50005000 1.80 60003800 2.10 70002600 2.40 80001400 2.50 9000200 At a price of $1.20, excess supply (Q S (P) - Q D (P) ) is given by 4,000 - 6,200 = -2,200

9. At a given price, the excess of the quantity demanded over the quantity supplied is called the excess demand. Excess demand Excess Demand = Q D (P) - Q S (P)

10. Quantity Price (per lb) supplieddemanded 0.310009800 0.6020008600 0.90 3000 7400 1.20 40006200 1.50 50005000 1.80 60003800 2.10 70002600 2.40 80001400 2.50 9000200 At a price of $0.90, excess demand (Q D (P) - Q S (P) ) is given by 7,400 - 3,000 = 4,400

11. Quantity Price (per lb) supplieddemanded 0.310009800 0.6020008600 0.90 3000 7400 1.20 40006200 1.50 50005000 1.80 60003800 2.10 70002600 2.40 80001400 2.50 9000200 At a price of $2.10, excess demand (Q D (P) - Q S (P) ) is given by 2,600 - 7,000 = -4,400

12. Market Equilibrium A market is in equilibrium when the price is such that the quantity supplied is equal to quantity demanded. A market is in equilibrium when the price is such that excess supply equals excess demand equals zero.

13. Excess supply and excess demand and price pressure When the quantity demanded in the market exceeds the quantity supplied at a given price, there is excess demand, and the price will tend to rise. Q D (P) > Q S (P)

14. When the price in the market rises, Excess demand and excess supply and price pressure until an equilibrium is reached at which quantity demanded equals quantity supplied. quantity demanded falls & quantity supplied rises

15. The process of price rising so that excess demand falls to zero is called price rationing

16. Graphical analysis of excess supply 0 0.5 1 1.5 2 2.5 3 3.5 020004000600080001000012000 Quantity Price D0D0 S0S0S0S0 Q S (P) > Q D (P) Price Falls Supply = Demand

17. Graphical analysis of excess demand 0 0.5 1 1.5 2 2.5 3 3.5 020004000600080001000012000 Quantity Price D0D0 S0S0S0S0 Price Rises Supply = Demand Q D (P) > Q S (P)

18. Algebraic analysis of supply and demand Equilibrium  Supply = Demand To find an equilibrium in a market: 1. Set supply equal to demand and solve for P. 2.Substitute P in the supply and demand equations to get the quantities.

19. Q D = 20 - 2P Example Demand Equation

20. Demand 0 2 4 6 8 10 12 14 024681012141618202224 Quantity Price D0D0 Q D = 20 - 2P

21. Example Supply Equation Q S -4 + 2P

22. Supply 0 2 4 6 8 10 12 14 024681012141618202224 Quantity Price S0S0 Q S -4 + 2P

23. 0 2 4 6 8 10 12 14 024681012141618202224 Quantity Price D0D0 S0S0 Demand and Supply Q D = 20 - 2P Q S -4 + 2P

24. Example Calculation Q D = 20 - 2P = -4 + 2P = Q S Set supply equal to demand and solve the equation for P. +4 + 4 24 - 2P = 2P 24 = 4P 4 4 6 = P +2P 24 = 4P 20 - 2P = -4 + 2P Q D = 20 - 2P = 20 – 2(6) = 8

25. Some notes on solving equations a.add the same number We get equivalent equations if on both sides of the equality sign we do the following: b.subtract the same number c.multiply by the same number  0 d. divide by the same number  0.

26. Comparative Statics or What happens when things change Demand Shifts Increases in demand (shifts to the right) will increase the equilibrium price and quantity. Decreases in demand (shifts to the left) will decrease the equilibrium price and quantity.

27. Changes in Demand 0 2 4 6 8 10 12 14 16 0510152025 Quantity Price D0D0 S0S0 D1D1 D2D2

28. Increases in supply (shifts to the right) will decrease the equilibrium price and increase the equilibrium quantity. Supply Shifts Decreases in supply (shifts to the left) will increase the equilibrium price and decrease the equilibrium quantity.

29. Changes in Supply 0 2 4 6 8 10 12 14 05101520 Quantity Price D0D0 S0S0 S1S1 S2S2

30. Price Ceilings A price ceiling occurs when some outside force sets a price for the market that is below the equilibrium price. When quantity supplied & quantity demanded differ, the short side of the market — whichever of the two quantities is less — will prevail.

31. Price Ceiling 0 0.5 1 1.5 2 2.5 3 3.5 020004000600080001000012000 Quantity Price D0D0 S0S0S0S0 Queuing Q D (P) > Q S (P) Supply  Demand

32. The results: A black market Queuing Shortages

33. Price Floors A price floor occurs when some outside force sets a price for the market that is above the equilibrium price. When quantity supplied & quantity demanded differ, the short side of the market — whichever of the two quantities is less — will prevail.

34. Price Floor 0 0.5 1 1.5 2 2.5 3 3.5 020004000600080001000012000 Quantity Price D0D0 S0S0S0S0 Excess Supply Q S (P) > Q D (P) Supply  Demand

35. The results: Excess supply Unemployment

36. The End