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Supply, Demand, and Equilibrium
Markets bring buyers and sellers together.
The forces of supply and demand work together in markets to establish prices - HOW?
In our economy, prices form the basis of economic decisions.
Like scissor blades, supply and demand are valuable when used together. They are a tool to help us understand and predict changes in a market. Understanding one or the other is not enough. You need to be able to put them together.
A competitive market is in equilibrium where the quantity demanded equals the quantity supplied.
The corresponding price and quantity is called the equilibrium price and the equilibrium quantity.
point of intersection of demand and supply curve:
Means: Market is stable
A market will always tend toward equilibrium - this means that price and quantity will gradually move towards their equilibrium levels.
The equilibrium price is also known as the market-clearing price.
The equilibrium price “clears the market” for a good or service because it ensures that every buyer willing to pay it will find a seller willing to sell at that price—and vice versa.
If a seller has seven donuts on the shelf at $1 per donut, and consumers only want seven donuts at that price, then the market is at equilibrium.
MARKET DISEQUILIBRIUM
Occurs when the quantity supplied does not equal the quantity demanded.
Occurs when the price is not right.
If the price is too high or too low for that particular market, disequilibrium occurs.
Too many cookies and not enough
consumers creates a surplus.
When quantity demanded is higher than quantity supplied, a shortage occurs.
The ideas of consumer surplus, producer surplus, and deadweight loss are going to come up again and again throughout the course.
Emphasize to students that a deadweight loss is the lost efficiency due to the fact that a mutually beneficial transactions (when the value to consumers is greater than the cost to producers) is not able to take place.
Before Change (Draw equilibrium)
The Change (S or D, Identify Shifter)
After Change (Price and Quantity After)
Simultaneous Shifts of Supply & Demand
Double Shift Rule:
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous)
Suppose the demand for milk increased at the same time as production technology improved.
Use S&D Analysis to show what will happen to PRICE and QUANTITY.
Double Shift Rule:
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous)
