Supply and Supply and DemandDemand

Supply and Supply and DemandDemand

Pricing and Market Equilibrium

Pricing and Market Equilibrium

©© 2002 by Nelson, a division of Thomson Canada Limited 2002 by Nelson, a division of Thomson Canada Limited©© 2002 by Nelson, a division of Thomson Canada Limited 2002 by Nelson, a division of Thomson Canada Limited

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 2

SUPPLY AND DEMAND SUPPLY AND DEMAND TOGETHERTOGETHER

• Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

• Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 3

EquilibriumEquilibrium

• 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.

• 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.

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 4

At $2.00, the quantity demanded is equal to the quantity supplied!

Demand Schedule

Supply Schedule

EquilibriumEquilibrium

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 5

Equilibrium price

Demand

Supply

$2.00

6 8 100

Equilibrium

Equilibrium quantity

Quantity of Ice-Cream Cones

Price of Ice-Cream

Cone

421 3 5 7 9 11

Figure 4-8: The Equilibrium of Supply and Figure 4-8: The Equilibrium of Supply and DemandDemand

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 6

EquilibriumEquilibrium

• Surplus– When price > equilibrium price, then quantity

supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales,

thereby moving toward equilibrium.

• Shortage– When price < equilibrium price, then quantity

demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers

chasing too few goods, thereby moving toward equilibrium.

• Surplus– When price > equilibrium price, then quantity

supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales,

thereby moving toward equilibrium.

• Shortage– When price < equilibrium price, then quantity

demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers

chasing too few goods, thereby moving toward equilibrium.

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 7

Demand

Supply

$2.00

6 8 100 Quantity of Ice-Cream Cones

Price of Ice-Cream

Cone

421 3 5 7 9 11

$2.50

Surplus

Quantity Demanded

Quantity Supplied

Figure 4-9 a): Excess SupplyFigure 4-9 a): Excess Supply

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 8

Demand

Supply

$2.00

6 8 100 Quantity of Ice-Cream Cone

Price of Ice-Cream

Cone

421 3 5 7 9 11

$1.50

Shortage

Quantity Supplied

Quantity Demanded

Figure 4-9 b): Excess DemandFigure 4-9 b): Excess Demand

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 9

Three Steps To Analyzing Three Steps To Analyzing Changes in EquilibriumChanges in Equilibrium

• Decide whether the event shifts the supply or demand curve (or both).

• Decide whether the curve(s) shift(s) to the left or to the right.

• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

• Example: A Heat Wave

• Decide whether the event shifts the supply or demand curve (or both).

• Decide whether the curve(s) shift(s) to the left or to the right.

• Use the supply-and-demand diagram to see how the shift affects equilibrium price and quantity.

• Example: A Heat Wave

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 10

D1

Supply

$2.00

6 100 Quantity of Ice-Cream Cone

Price of Ice-Cream

Cone

421 3 5 7 11

D2

$2.50

1. Hot weather increases the demand for ice cream…

2. … resulting in a higher price …

3. … and a higher quantity sold.

New equilibrium

Initial equilibrium

Figure 4-10: How an Increase Demand Figure 4-10: How an Increase Demand Affects the EquilibriumAffects the Equilibrium

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 11

Demand

S1

$2.00

100 Quantity of Ice-Cream Cones

Price of Ice-Cream

Cone

421 3 7 11

S2

$2.50

1. An earthquake reduces the supply of ice cream…

2. … resulting in a higher price …

3. … and a lower quantity sold.

New equilibrium

Initial equilibrium

Figure 4-11: How a Decrease Demand Figure 4-11: How a Decrease Demand Affects the EquilibriumAffects the Equilibrium

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 12

D1

S1

0 Quantity of Ice-Cream Cone

Price of Ice-Cream

Cone

Q1

D2

Large increase in demand

P2

S2

Q2

New equilibrium

Small decrease in supply

Initial equilibriumP1

Figure 4-12 a): A Shift in Both Supply and Figure 4-12 a): A Shift in Both Supply and DemandDemand

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 13

D1

S1

0 Quantity of Ice-Cream Cone

Price of Ice-Cream

Cone

Q1

D2

Large decrease in supply

P2

S2

Q2

New equilibrium

Small increase in demand

Initial equilibriumP1

Figure 4-12 b): A Shift in Both Supply and Figure 4-12 b): A Shift in Both Supply and DemandDemand

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 14

Table 4-8: What Happens to Price and Table 4-8: What Happens to Price and Quantity when Supply or Demand ShiftsQuantity when Supply or Demand Shifts

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 15

Concluding Remarks…Concluding Remarks…

• Market economies harness the forces of supply and demand. . .

• Supply and Demand together determine the prices of the economy’s different goods and services. . .

• Prices in turn are the signals that guide the allocation of resources.

• Market economies harness the forces of supply and demand. . .

• Supply and Demand together determine the prices of the economy’s different goods and services. . .

• Prices in turn are the signals that guide the allocation of resources.

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 16

SummarySummary

• Market equilibrium is determined by the intersection of the supply and demand curves.

• At the equilibrium price, the quantity demanded equals the quantity supplied.

• The behavior of buyers and sellers naturally drives markets toward their equilibrium.

• Market equilibrium is determined by the intersection of the supply and demand curves.

• At the equilibrium price, the quantity demanded equals the quantity supplied.

• The behavior of buyers and sellers naturally drives markets toward their equilibrium.

Mankiw et al.: Principles of Microeconomics, 2nd Canadian edition. Chapter 4: Page 17

The EndThe End