copyright © pearson education, inc.slide 1 chapter 6, section 2 essential question ch 6: what is...

Copyright © Pearson Education, Inc. Slide 1Chapter 6, Section 2

Essential QuestionEssential QuestionCh 6: What is the right price?

• Section 2: How do changes in S&D affect equilibrium


ObjectivesObjectives

1. Explain why a free market naturally tends to move toward equilibrium.

2. Analyze how a market reacts to an increase or decrease in supply.

3. Analyze how a market reacts to an increase or decrease in demand.


Discussion: Technology and Changing MarketsDiscussion: Technology and Changing Markets

• How did the invention of digital cameras affect the demand for 35mm film cameras?

– Demand for digital increase; Demand for film decrease

• As digital camera technology improved, what happened to the supply of digital cameras? Why?

– Supply increased to match increased demand.

– Technology led to improvements and lowered costs. This increased supply

– You can get a 7.1MP camera now for the same cost as a 3MP camera a few years ago

– Supply shifts to the right



• What has happened to the price or quality of digital cameras over time?

– Get a better camera now for the same amount of money

– Price for the same camera has fallen over time



• Kodak suffered from the invention of digital cameras.

• Picasa/Shutterfly and other online picture services have boomed

• What other products might have been affected by the advancement in camera technology?

Digital Cameras



• In groups of 3-4 people, take 6 minutes to discuss the following:

– Pick a pair of products you suggested in the Bell Ringer or two products from the diagram on the previous slide

– Discuss in your group how the supply and demand curves for each product have changed over time

• ie. Supply and demand of digital cameras increased; supply and demand of film cameras decreased

– What happened to the price and why?

– What related fields/products/services have been affected by the changing technology?

• Select a group member to share out to the class.


IntroductionIntroduction

• How do changes in supply and demand affect equilibrium?

1. Changes in supply and demand cause shifts in the curve(s)

2. Shift in a curve causes prices to go up and down, which causes disequilibrium

3. In a free market, price and quantity will tend to move toward equilibrium whenever they find themselves in disequilibrium

• this is often a new equilibrium price and output


Equilibrium: a “Moving Target”Equilibrium: a “Moving Target”

• Equilibrium for most products is in constant motion.– Buyers/sellers are always adjusting the price and

quantity they agree upon – Think of bargaining in a marketplace

• Think of equilibrium as a “moving target” that changes as market conditions change. – As supply or demand increases or decreases, a new

equilibrium is created for that product.


The Pull Back to EquilibriumThe Pull Back to Equilibrium

• When a market is in disequilibrium, there are either shortages or surpluses

• The market will eventually move back toward equilibrium.– Shortages cause a firm to raise its prices.

• Higher prices cause the quantity supplied to rise and the quantity demanded to fall until the two values are equal again.

– Surpluses cause a firm to drop its prices. • Lower prices cause the quantity supplied to fall and the

quantity demanded to rise until equilibrium is restored.


Changes in Supply and New EquilibriumChanges in Supply and New Equilibrium

• A shift in the supply curve will change the equilibrium price and quantity.

• As supply increases, the market moves toward a new equilibrium– Price lower, Quantity higher than original

equilibrium

• As supply decreases, the market moves toward a new equilibrium– Price higher, Quantity lower than original

equilibrium



• Factors that change supply

• An example of a product that saw a radical market change in recent years is the digital camera.

Factor Effect on Supply Shift L/R

Rising Costs Decrease Supply Shift Left

Falling Costs Increase Supply Shift Right

Technology/Innovation Increase Supply Shift Right

Subsidy Increase Supply Shift Right

Tax Decrease Supply Shift Left

Regulation Decrease Supply Shift Left

More Suppliers Increase Supply Shift Right


• Checkpoint: What happens to the equilibrium price when the supply curve shifts to the right?

a) Original equilibrium: P*=$900 and Q*=2mm

b) An increase in supply shifts the supply curve to the right. Disequilibrium from surplus:

Qd=2mm, Qs=4mm; 2mm surplus

c) Firms drop prices to reduce surplus. New equilibrium:

P2=$450 and Q2=3mm

Market for Digital Cameras


Price changes in response to change in supply


• A shift in the demand curve will change the equilibrium price and quantity.

• As demand increases, the market moves toward a new equilibrium– Price higher, Quantity higher than original

equilibrium

• As demand decreases, the market moves toward a new equilibrium– Price lower, Quantity lower than original equilibrium

Changes in Demand and New EquilibriumChanges in Demand and New Equilibrium


• Factors that change demand

Factor Effect on Demand Shift L/R

Rising Income Increase Demand Shift Right

Rising Population Increase Demand Shift Right

Changing Demographics

Depends Depends

Advertising/Marketing Increase Demand Shift Right

Rising Demand for Complements

Increase Demand Shift Right

Rising Demand for Substitutes

Decrease Demand Shift Left




• Checkpoint: What happens to the equilibrium price when the demand curve shifts to the right?

a) Original equilibrium:

P*=$25 and Q*=300k

b) An increase in demand shifts the demand curve to the right.

Disequilibrium from shortage:

Qd=500k, Qs=300k;

200k surplus

c) Firms raise prices to reduce shortage. New equilibrium:

P2=$30 and Q2=400k

Demand for New Era 59/50 Hats


Fads and ShortagesFads and Shortages

• Fads often lead to an increase in demand for a particular good.

• As a result of fads, shortages appear to customers in different forms:– Empty shelves at the

stores– Long lines to buy a product

in short supply– Rising search costs, such

as driving to multiple stores to find a product.


Putting it All Together:Changes in Supply/DemandPutting it All Together:Changes in Supply/Demand

Change

(ceteris paribus)

Disequilibrium Effect

New Equilibrium

Supply Increases Surplus

(Qs>Qd)

Price Falls, Quantity Rises

Supply Decreases Shortage

(Qs<Qd)

Price Rises, Quantity Falls

Demand Increases Shortage

(Qs<Qd)

Price Rises, Quantity Rises

Demand Decreases

Surplus

(Qs>Qd)

Price Falls,

Quantity Falls


Key TermsKey Terms

• inventory: the quantity of goods that a firm has on hand (this gets bigger when there is a surplus and smaller when there is a shortage)

• fad: a product that is popular for a short period of time

• search costs: the financial and opportunity costs that consumers pay when searching for a good or service (increased from a shortage). Internet has decreased search costs.

copyright © pearson education, inc.slide 1 chapter 6, section 2 essential question ch 6: what is...

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