Principles of Micro

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Principles of Micro
by Tanya Molodtsova, Fall 2005

• Chapter 4 THE MARKET FORCES OF SUPPLY AND
  DEMAND

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III. Supply and Demand Together Equilibrium

• The point where the supply and demand curves
  intersect is called the markets equilibrium.
• equilibrium a situation in which the price has
  reached the level where quantity supplied equals
  quantity demanded.

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III. Supply and Demand Together Equilibrium

• equilibrium price the price that balances
  quantity supplied and quantity demanded.
• On a graph, it is the price at which the supply
  and demand curves intersect.
• equilibrium quantity the quantity supplied and
  the quantity demanded at the equilibrium price.
• On a graph it is the quantity at which the
  supply and demand curves intersect.

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III. Supply and Demand Together
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The Equilibrium of Supply and Demand
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III. Supply and Demand Together

• When market price the equilibrium price ? there
  will be a surplus of the good.
• surplus a situation in which quantity supplied
  quantity demanded.
• To eliminate the surplus, producers will lower
  the price until the market reaches equilibrium.

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III. Supply and Demand Together
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III. Supply and Demand Together

• When price be a shortage of the good.
• shortage a situation in which quantity demanded
  quantity supplied.
• Sellers will respond to the shortage by raising
  the price of the good until the market reaches
  equilibrium.

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III. Supply and Demand Together
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III. Supply and Demand Together

• Law of Supply and Demand the claim that the
  price of any good adjusts to bring the supply and
  demand for that good into balance.

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Three Steps to Analyzing Changes in Equilibrium

• Decide whether the event shifts the supply or
  demand curve (or both).
• Decide in which direction the curve shifts.
• Use the supply-and-demand diagram to see how the
  shift changes the equilibrium price and quantity.

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Shifts in Curves vs. Movements Along Curves

• A shift in the demand curve is called a "change
  in demand." A shift in the supply curve is
  called a "change in supply."
• A movement along a fixed demand curve is called a
  "change in quantity demanded." A movement along
  a fixed supply curve is called a "change in
  quantity supplied."

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How an Increase in Demand Affects the Equilibrium
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How a Decrease in Supply Affects the Equilibrium
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A Change in Both Supply and Demand

• if you do not know the relative sizes of these
  shifts, the end effect on either equilibrium
  price or equilibrium quantity will be ambiguous.
• The outcome depends on the relative sizes of the
  shifts in supply and demand