Lecture 6: Market Equilibrium, Demand and Supply Shifts

Lecture 6: Market Equilibrium, Demand and Supply Shifts Session ID: DDEE EC101 DD & EE / Manove Supply & Demand p1 EC101 DD & EE / Manove Clicker Q...
Author: Arline Sanders
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Lecture 6: Market Equilibrium, Demand and Supply Shifts Session ID: DDEE

EC101 DD & EE / Manove Supply & Demand

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EC101 DD & EE / Manove Clicker Question

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Market Equilibrium A competitive market is in equilibrium if the quantity supplied equals the quantity demanded at the market price. At the market equilibrium, the price is called the equilibrium price, … …and the quantities supplied and demanded are called the equilibrium quantity. In equilibrium, the price and quantity have no tendency to change (more later).

In general, a system is in equilibrium when there is no tendency for change. EC101 DD & EE / Manove Supply & Demand>Market Equilibrium

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Example: The Market for Milk In the market for milk described previously, market supply and demand are as follows. Price ($) 0.20 0.40 0.60 0.80 1.00 1.20

Market Market Supply Demand (Qts/day) (Qts/day) 300 600 1200 1800 2400 3600

3200 2000 1200 600 200 100

The market equilibrium is described by a $.60 price and a traded quantity of 1200 quarts. EC101 DD & EE / Manove Supply & Demand>Market for Milk>Equilibrium

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Equilibrium in the Market for Milk on a Graph Market Supply & Demand for Milk

P

QS

1.40

QD

300

3200

1.20

0.40

600

2000

1.00

0.60

1200

1200

0.80

1800

600

1.00

2400

200

1.20

3600

100

Price

0.20

0.80 0.60 0.40 0.20 0.00 0

1000

2000 Quantity

3000

EC101 DD & EE / Manove Supply & Demand>Market for Milk>Graph>Equilibrium

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Movement towards Market Equilibrium If the price is above the equilibrium price,  quantity supplied > quantity demanded,   excess supply.  Sellers cannot sell as much as they want,

 so they will tend to offer buyers a lower price.

Therefore, the price will tend to move downwards towards the equilibrium price. EC101 DD & EE / Manove Supply & Demand>Excess Supply

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If the price is below the equilibrium price, quantity demanded > quantity supplied  excess demand, buyers will not be able to buy all they want to buy, so they will tend to offer sellers a higher price.

Therefore, the price will tend to move upwards towards the equilibrium price.

EC101 DD & EE / Manove Supply & Demand>Excess Demand

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EC101 DD & EE / Manove Clicker Question

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Movement Towards Equilibrium in the Market for Milk Market Supply & Demand for Milk 1.40

P

QS

QD

300

3200

1.20

0.40

600

2000

1.00

0.60

1200

1200

0.80

1800

600

1.00

2400

200

1.20

3600

100

Price

0.20

Excess Supply

0.80 0.60 0.40 0.20

Excess Demand

0.00 0

1000

2000 Quantity

3000

4000

EC101 DD & EE / Manove Supply & Demand>Movement Towards Equilibrium

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The Effect of Price Changes Price ($)

6

If Price changes, a buyer will MOVE ALONG his original demand curve, …

D

5

Price

4

A

…because the same demand curve yields the quantity demanded at

B

3 2 1 0

Quantity 40

60

D 120

every reasonable price. Quantity

Likewise, if price changes, a seller will MOVE ALONG her original supply curve, because the same supply curve yields the quantity supplied at every reasonable price. EC101 DD & EE / Manove Supply & Demand>Price Changes

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Demand-Curve Shifts Changes in some demand-related factors affect the quantities demanded at every price: Consumer preferences Income Prices of other goods Expectations about the future

Such changes can affect demand in general,… …and they can change the position of the entire demand curve. EC101 DD & EE / Manove Supply & Demand>Demand-Curve Changes

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Changes in Consumer Preferences  Consumer preferences change for many reasons. New information Fashion Experience

 These changes can shift demand. EC101 DD & EE / Manove Supply & Demand>Demand-Curve Changes

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Example: Preference for Milk New evidence emerges that milk… Price

_____ milk demanded at every price.

8

6

S

D’

D

B 4

New market equilibrium:

A

2

0

10

20

30

40

Quarts of Milk

EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Baldness

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Example 2: Preference for Milk New evidence shows that milk… Price 8

D

D’

6

4

2

0

Slope increases because of narrow range of desirable quantities

10

S

D’ Another possibility

A

In new equilibrium: ???

B

20

(but that depends on where the curves cross) 30

40

Quantity

EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Complexion

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EC101 DD & EE / Manove Clicker Question

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Income and Demand Demand is affected by a person’s income. Normal goods: demand increases as income rises.

Inferior goods: demand increases as income falls.

EC101 DD & EE / Manove Elasticity of Demand>Income

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Example: Apartments and Income in Washington DC Government salaries increase. Price 8

S 6

D’

D

Apartments are normal goods,… but the supply curve is almost vertical,…

B

because it takes a long time to build more apartments.

4

A

2

0

10

20

In new equilibrium:

30

40

Apartments

EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Apartments

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Substitutes Two goods are substitutes if you can use one of them instead of the other. Demand for a good (chicken) increases when the price of a substitute (hamburger) rises,…

because consumers want to buy less of the substitute,… and consume more of the first good instead —at every price. Supply DD & Demand>Demand-Curve Shifts>Substitutes EC101 & EE / Manove

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Example: Car rentals and Airfares Airfares are rising sharply. (And the quality of air travel is falling.)

Price 8

6

Road travel is a substitute for air travel, so demand for rental cars will increase.

D’

D

S

B In new equilibrium:

4

A

2

0

10

20

30

40

Car Rentals

EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Car Rentals

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Complements  Two goods are complements if you normally use both of them together.

Demand for a good decreases when the price of a complement rises,… because if the complement is too expensive, the first good is less useful.

EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Complements

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Example: Motel Rooms and Gasoline Prices Price

Gasoline prices increase.

80

S

D 60

D’

A

Motel rooms and gasoline are complements. In new equilibrium:

40

B

20

0

100

200

300

400

Rooms rented

EC101 DD & EE / Manove Supply & Demand>Demand-Curve Shifts>Motel Rooms

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Supply-Curve Changes  Changes in some supply-related factors will affect the quantities supplied at every price: Prices of Inputs Technology Economic Environment

 Changes in these factors affect supply in general,…  …and they can shift the entire supply curve. EC101 DD & EE / Manove Supply & Demand>Supply-Curve Changes

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Example: Supply of Milk and Mad Cows Mad-cow disease kills many cows.

Price 8

D

S’

S In new equilibrium:

6

B A

4

2

0

100

200

300

400

Quarts of Milk

EC101 DD & EE / Manove Supply & Demand>Supply-Curve Shifts>Cows

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Example: Supply of Milk and Hormones BST is discovered.

Price 8

D S

6

S’

Causes each cow to give much more milk.

A In new equilibrium:

B

4

2

0

100

200

300

400

Quarts of Milk

EC101 DD & EE / Manove Supply & Demand>Supply-Curve Shifts>Hormones

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Example: Opium and the Taliban Price 80

D

60

S

S’

restrictions on opium production were relaxed.

A B

40

In 2001, after the Afghan Taliban regime fell,...

In new equilibrium: 20

0

100

200

300

400

Opium Output

EC101 DD & EE / Manove Supply & Demand>Supply-Curve Shifts>Opium

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EC101 DD & EE / Manove Clicker Question

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End of File

EC101 DD & EE / Manove End of File

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