chapter 6. why does the market tend towards equilibrium? excess demand leads firms to raise...
TRANSCRIPT
SECTION 2: CHANGES IN MARKET EQUILIBRIUM
Chapter 6
Why does the market tend towards equilibrium? Excess demand leads firms to raise prices, higher prices induce the quantity supplied to rise & the quantity demanded to fall until the two are equal
Excess supply will force firms to cut prices & falling prices cause quantity demanded to rise & quantity supplied to fall until they are equal
Changes in Price
Shifts in the supply curve caused by advances in technology, new government taxes & subsidies, & changes in the price of raw materials & labor
Shift in the supply curve will change the equilibrium price & quantity
Understanding a Shift in Supply
As firms develop better technology for producing a good, the price falls
Finding a New Equilibrium
Lower costs shift the supply curve to the right where at each price, producers are willing to supply a larger quantity
Surplus- when quantity supplied exceeds quantity demanded
Changing Equilibrium
Not usually an unchanging, single point on a graph
Follows the intersection of the demand & supply curves as that point moves downward along the demand curve
A Fall in Supply
When the supply curves shifts to the left, the equilibrium price & quantity sold will change as well
As the supply curve shifts to the left, suppliers raise their prices & the quantity demanded falls
New equilibrium price will be above & to the left of the original
Market price higher, quantity sold is lower
Shifts in Demand
The problem of excess demand Fad causes a sudden increase in market demand, & demand curve shifts to the rightLeads to excess demand (shortage)
Appears as empty shelves & long lines
Leads to search costsWhat are search costs? Available products must be rationed
Return to Equilibrium
As time passes, firms will raise prices
Eventually price equals quantity demanded
A Fall in Demand
What causes a fall in demand?
Excess demand turns into excess supply
Demand curve shifts to the left & prices cut
$80
0
$60
0
$40
0
$20
0
0
Pri
ce
Output (in millions)
Graph A: A Change in Supply
1 2 3 4 5
Analyzing Shifts in Supply & Demand
Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand.
Original supply
Demand
a
New supply
b
c
Graph B: A Change in Demand
Output (in thousands)
$60
$50
$40
$30
$20
$10
0
900800700600500400300200100
Pri
ce
Supply
Original demand
a
New demand
c
b