Supply and demand together
Put supply and demand curves on the same graph Intersection gives the equilibrium price and quantity
Price
PE
QE
Quantity
PE and QE represent the equilibrium price and quantity
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What is Equilibrium Price?
The price that equates the quantity demanded and the quantity supplied
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What happens if price is below equilibrium?
A shortage, or excess demand, arises
At P2, QD > QS, thus a shortage or excess demand exists
S
P2
QS
5
Shortage
QD
D
5
How is the shortage eliminated?
The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied.
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What happens if price is above equilibrium?
A surplus, or excess supply, arises
At P1, QD < QS, thus a surplus or excess supply exists
P1
Surplus
S
D
QD
8
QS
8
How is the surplus eliminated?
The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded.
Summary, shortages, surpluses, and equilibrium
P1 P3 P2
Surplus
Shortage
S
D
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Q3
How shifts in S and D affect equilibrium price and quantity
1 1
Right Shift in Demand
P2 P1
S
D2 D1
Q1
Q2
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Left Shift in Demand P1 P2
S1 D2
Q2
D1
13
Q1
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Summary, demand changes
Increased demand, price and quantity both rise Decreased demand, price and quantity both fall
1 4
Right Shift in Supply
S1
P1 P2
S2
D
Q1 Q2
1 5
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Left Shift in Supply
S2
P2 P1
S1
D
Q2 Q1
1 6
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Summary, supply changes
Increased supply, price falls, quantity rises Decreased supply, price rises, quantity falls
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If both curves shift, can predict price or quantity, but not both unless the magnitude of the shifts are known
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Supply and demand problems
Suppose apples and oranges are substitutes to consumers: Bad weather destroys many apple orchards--what happens to equilibrium price and quantity in the apple market? In the Orange market?? Illustrate graphically.
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S1 P P S
S
P2 P2 P1 P1 D D D1
Q2
Q1
Q1
Q2
Apple market, supply decreases, price rises, quantity falls
Orange market, demand increases, price and quantity rise
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Oprah Winfrey says on tv that she will never eat another hamburger. What might happen to the equilibrium price and quantity in the beef market? Show graphically with supply and demand curves.
21
Decrease in demand in the beef
market, price and quantity fall
P1 P2
S1 D2
Q2 Q1
22 22
D1
The demand for computers has clearly increased over time, due to higher incomes and changing preferences towards computers. Despite the increased demand, the price of computers has continued to fall. Show graphically with supply and demand curves how this could happen, and give some possible explanations.
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P2
S1
P1 P3
D1
D
If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more 24
