Chapter 3: Supply and DemandPart 2Econ 101: Microeconomics

Equilibrium: Putting Supply and Demand TogetherWhen a market is in equilibriumBoth price of good and quantity bought and sold have settled into a state of rest

Equilibrium price, p*, is a Market clearing price:Price at which quantity supplied ________________ quantity demanded. This quantity is called the Equilibrium quantity, Q*.

The equilibrium price and equilibrium quantity can be found on the _________ and _________ axes, respectivelyAt point where supply and demand curves cross

Market EquilibriumEP*DemandSupplyQ*

Excess DemandEHJDSp*Excess Demandp1Q1Q2Q*

Excess DemandExcess demandAt a given price, the excess of quantity demanded over quantity suppliedPrice of the good will rise as buyers compete with each other to get more of the good than is available

Excess SupplyKLEDSExcess Supply p*Q1Q2Q*p1

Excess SupplyExcess SupplyAt a given price, the excess of quantity supplied over quantity demandedPrice of the good will fall as sellers compete with each other to sell more of the good than buyers want

Income Rises: What Happens When Things ChangeIncome rises, causing ___________ in demand__________ shift in the demand curve causes _________ movement along the supply curveEquilibrium price and equilibrium quantity both _________Shift of one curve causes a movement along the other curve to new equilibrium point

Increase in IncomeEF'3.00D1D2S$4.0050,00060,000

An Ice Storm Hits: What Happens When Things ChangeAn ice storm causes _________ in _______Weather is _________ variable for _______ curveAny change that shifts the supply curve leftward in a market will increase the equilibrium priceAnd decrease the equilibrium quantity in that market

A Shift of Supply and A New EquilibriumE'E3.00D$5.0050,00035,000S2S1

Changes in the Market for Handheld PCsAB$400D2003S2002S2003D2002$5002.453.33

Both Curves ShiftWhen just one curve shifts (and we know the direction of the shift) we can determine the direction _______________________________________________When both curves shift (and we know the direction of the shifts) we can determine the direction __________________________________________________Direction of the other will depend on which curve shifts by more

The Three Step ProcessKey Step 1Characterize the MarketDecide which market or markets best suit problem being analyzed and identify decision makers (buyers and sellers) who interact thereKey Step 2Find the EquilibriumDescribe conditions necessary for equilibrium in the market, and a method for determining that equilibriumKey Step 3What Happens When Things ChangeExplore how events or government polices change market equilibrium

Using Supply and Demand: The Invasion of KuwaitWhy did Iraqs invasion of Kuwait cause the price of oil to rise?Immediately after the invasion, United States led a worldwide embargo on oil from both Iraq and KuwaitA significant decrease in the oil industrys productive capacity caused a shift in the supply curve to the leftPrice of oil increased

The Market For OilP2DE'P1EQ2Q1S2S1

Using Supply and Demand: The Invasion of KuwaitWhy did the price of natural gas rise as well?Oil is a substitute for natural gasRise in the price of a substitute increases demand for a goodRise in price of oil caused demand curve for natural gas to shift to the rightThus, the price of natural gas rose

The Market For Natural GasP4P3FQ3Q4SD2F'D1