Equilibrium Price and Quantity

1
Equilibrium Price and Quantity
2
Demand for Pizzas
QUANTITY PRICE
0 30.00
100 25.00
200 20.00
300 15.00
400 10.00
500 5.00
3
Demand Curve

• As the price rises, people are willing to buy
  fewer pizzas.
• As the price of pizza changes, move along the
  demand curve

4
Supply of Pizza
Quantity Price
0 5.00
100 10.00
200 15.00
300 20.00
400 25.00
500 30.00
600 35.00
5
SUPPLY

• At a higher price the firm is willing to supply
  more pizza.
• As price of pizza changes, move along the supply
  curve

6
Equilibrium Price and Quantity

• At low prices, people will want to buy more than
  people want to sell.
• Competition to buy will drive prices up.
• At high prices, people will want to sell more
  than people will want to buy
• Competition to sell will drive prices down
• Only when the quantity people want to sell equals
  the quantity people want to buy will price stop
  changing be in equilibrium.

PRICE SUPPLY DEMAND
0.00 0 500
5.00 0 400
10.00 100 300
15.00 200 200
20.00 300 100
25.00 400 0
30.00 500  0
7
Equilibrium price and quantity

• At low prices, people will want to buy more than
  people want to sell.
• Competition to buy will drive prices up.
• At high prices, people will want to sell more
  than people will want to buy
• Competition to sell will drive prices down
• Only when the quantity people want to sell equals
  the quantity people want to buy will price stop
  changing be in equilibrium.

8
Changes in Equilibrium

• A given supply and demand relationship will
  establish one equilibrium price and quantity.
• That price and quantity will not change, so long
  as none of the determinants of demand or supply
  change.
• If the determinants of demand or supply change,
  then the equilibrium price and quantity will
  change.

9
Method of determining changes in equilibrium
price and quantity

• Draw the diagram for the market.
• Show the initial equilibrium price and quantity.
  Label the axes. Be sure to indicate the product
  that goes on the X axis (Check that the D curve
  has a negative slope and the S curve has a
  positive slope.)
• Decide whether the change will affect the demand
  curve or the supply curve.
• Does it change how much people will wish to buy
  at each price or how much they wish to sell?
  Usually only one will shift.
• Decide whether the change shifts the curve out,
  or shifts the curve in.
• Draw the new supply or demand curve and indicate
  the new equilibrium price and quantity.
• Write the explanation telling why the curve
  shifted and gave a new equilibrium.
• Read your diagram to make sure you are telling a
  logical story.

10
Examples for the blueberry market.

• Change The price of strawberries rises.
• Change The price of cherries, a close substitute
  of blueberries, falls sharply
• Change The price of whip cream, a complement of
  blueberries, falls sharply
• Change The cost of pesticides to control bugs on
  the blueberry crop falls.
• Change Incomes in Nova Scotia increase.
• Change wage rates paid to blueberry pickers
  rise.
• Change The cost of labour to harvest blueberries
  rises sharply
• Change A clever farmer designs a new blueberry
  harvesting machine which can harvest berries more
  efficiently

11
The Blueberry Market Pe.45 Qe800
Price Supply Demand
0.05 0 1600
0.15 200 1400
0.25 400 1200
0.35 600 1000
0.45 800 800
0.55 1000 600
0.65 1200 400
0.75 1400 200
0.85 1600 0
12
Response to fall in the cherry price

• Since the price of a substitute has fallen,
  people want to buy fewer blueberries at every
  price
• Competition to sell drives price down
• New Pe .40
• New Qe 700

13
Response to fall in pesticide price
Since the cost of production has fallen, people
want to sell more blue-berries at every price.
Competition to sell drives price down New Pe
.40 New Qe 900
14
Response to rise in wage rates of blueberry
pickers

• Since the cost of production has risen, people
  want to sell fewer blueberries at every price
• Competition to buy at old price drives price up
• New Pe .50
• New Qe 700

15
Response to rise in Canadian incomes

• Since incomes have risen, people want to buy more
  blueberries at every price
• Competition to buy at old price drives price up
• New Pe .50
• New Qe 700

16
Response to better harvesting machine

• Since the cost of production has fallen, people
  want to sell more blueberries at every price.
  Competition to sell drives price down
• New Pe .40
• New Qe 900