Changes in Market Equilibrium

1
Changes in Market Equilibrium

• Chapter 6, Section 2

2
Changes in Market Equilibrium

• When the supply or the demand curve shifts, a new
  equilibrium occurs.
• Then, the market price and quantity sold move
  toward the new equilibrium.

3
Excess Demand

• Excess demand leads firms to raise prices
• Higher prices lead to more quantity supplied
• The quantity demanded falls until the two values
  (price and quantity demanded) are equal

4
Excess Supply

• Excess supply will force firms to cut prices.
• Falling prices will cause quantity demanded to
  rise and quantity supplied to fall until they are
  equal.

5
Changes in Prices

• Factors that shift the supply curve to the left
  or right include
• Advances in technology
• New government taxes / subsidies
• Changes in price of raw material / labor

6
Changes in Prices

• Equilibrium occurs at the intersection of the
  demand curve and supply curve.
• Therefore,
• A shift in the demand curve or the supply curve
  will change the equilibrium price.
• A functioning market will carefully balance
  supply and demand.

7
Chapter 6, Section 3 Roles of Prices

• In a free market, prices are a tool for
  distributing goods and resources throughout the
  economy.
• Price is a language both sellers and buyers
  understand. It is a way of putting a standard
  measure of value on a good or service.

8
Roles of Prices, cont.

• Prices give the consumers and producers
  incentives.
• When prices are low, the consumer has the
  incentive to buy more.
• When prices are high, the producer has the
  incentive to produce more.

9
Roles of Prices, cont.

• Prices are very flexible and can easily be
  changed to solve the problem of excess demand or
  excess supply.
• Prices can be raised to solve the problem of
  excess demand.
• Prices can be lowered to solve the problem of
  excess supply.

10
Supply Shock

• Supply shock is a sudden shortage of a good.
  Suppliers can no longer meet the needs of
  consumers.
• Solution 1 Increase supply -- the problem is it
  might take some time.
• Solution 2 Rationing Dividing up goods or
  services and distributing them using criteria
  other than price. This might also take time.

11
Wide Choice of Goods

• One benefit of a market- based economy is the
  diversity of goods and services consumers can
  buy.
• Price allows the consumers to choose among
  similar goods.

12
The Black Market

• The Black Market is a market in which goods and
  services are sold illegally.
• Usually a consequence of rationing.
• Consumers pay more so they can buy a good when
  rationing makes it otherwise unavailable.
• The Black Market can also allow consumers to buy
  goods cheaper because there are no government
  taxes on these goods.

13
Efficient Resource Allocation

• A free market allows resources to be utilized
  efficiently.
• Land, labor and capital will be used for their
  most valuable purposes.

14
Market Problems

• Imperfect Competition Only a few firms
  providing a good or service
• Spillover Costs (Externalities) Costs of
  production
• Air pollution
• Water pollution
• Imperfect Information Consumers and/or
  producers do not have enough information to make
  informed choices about a product
• Buying a car