PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Supply and DemandOverheadsEquilibriumEquilibrium is defined a state of rest; a situation that, one achieved, will not change,unless some external factor,previously held constant, changes.Market Equilibriumare equal.A market is said to be in equilibriumif the price in the market is such thatthe quantity supplied (QS) in the marketand the quantity demanded (QD) in the marketDemand and Supply of Hamburger Patties00.511.522.533.50 2000 4000 6000 8000 10000 12000QuantityPriceD0SS00Supply = Demand3333.336666.66Quantity Quantity Price (per lb) supplied demanded0.3 1000 98000.60 2000 86000.90 3000 74001.20 4000 62001.50 5000 50001.80 6000 38002.10 7000 26002.40 8000 14002.50 9000 200At a given price, the excess of thequantity supplied over the quantity demandis called the excess supply.Excess supply and excess demandExcess supplyExcess supply = QS (P) - QD (P)Quantity Quantity Price (per lb) supplied demanded0.3 1000 98000.60 2000 86000.90 3000 74001.20 4000 62001.50 5000 50001.80 6000 38002.10 7000 26002.40 8000 14002.50 9000 200At a price of $2.10, excess supply (QS (P) - QD (P) ) is given by7,000 - 2,600 = 4,400Quantity Quantity Price (per lb) supplied demanded0.3 1000 98000.60 2000 86000.90 3000 74001.20 4000 62001.50 5000 50001.80 6000 38002.10 7000 26002.40 8000 14002.50 9000 200At a price of $1.20, excess supply (QS (P) - QD (P) ) is given by4,000 - 6,200 = -2,200At a given price, the excess of thequantity demanded over the quantity suppliedis called the excess demand.Excess demandExcess Demand = QD (P) - QS (P)Quantity Quantity Price (per lb) supplied demanded0.3 1000 98000.60 2000 86000.90 3000 74001.20 4000 62001.50 5000 50001.80 6000 38002.10 7000 26002.40 8000 14002.50 9000 200At a price of $0.90, excess demand (QD (P) - QS (P) ) is given by7,400 - 3,000 = 4,400Quantity Quantity Price (per lb) supplied demanded0.3 1000 98000.60 2000 86000.90 3000 74001.20 4000 62001.50 5000 50001.80 6000 38002.10 7000 26002.40 8000 14002.50 9000 200At a price of $2.10, excess demand (QD (P) - QS (P) ) is given by2,600 - 7,000 = -4,400Market EquilibriumA market is in equilibrium when the price is such that the quantity suppliedis equal to quantity demanded.A market is in equilibrium when the price is such that excess supply equals excess demand equals zero.Excess supply and excess demand and price pressureWhen the quantity demanded in the marketexceeds the quantity supplied at a given price,there is excess demand,there is excess demand,and the price will tend to rise. QD (P) > QS (P)When the price in the market rises,Excess demand and excess supply and price pressureuntil an equilibrium is reached at whichquantity demanded equals quantity supplied.quantity demanded fallsquantity demanded falls& quantity supplied rises& quantity supplied risesThe process of price rising so thatexcess demand falls to zero is calledprice rationingGraphical analysis of excess supply00.511.522.533.50 2000 4000 6000 8000 10000 12000QuantityPriceD0SS00QS (P) > QD (P)Price FallsSupply = DemandGraphical analysis of excess demand00.511.522.533.50 2000 4000 6000 8000 10000 12000QuantityPriceD0SS00Price RisesSupply = DemandQD (P) > QS (P)Algebraic analysis of supply and demand Equilibrium Supply = DemandTo find an equilibrium in a market:1. Set supply equal to demand and solve for P.2. Substitute P in the supply anddemand equationsto get the quantities.QD = 20 - 2PExample Demand EquationDemand024681012140 2 4 6 8 10 12 14 16 18 20 22 24QuantityPriceD0 QD = 20 - 2PExample Supply Equation QS -4 + 2PSupply024681012140 2 4 6 8 10 12 14 16 18 20 22 24QuantityPriceS0 QS -4 + 2P024681012140 2 4 6 8 10 12 14 16 18 20 22 24QuantityPriceD0S0Demand and Supply QD = 20 - 2P QS -4 + 2PExample Calculation QD = 20 - 2P = -4 + 2P = QSSet supply equal to demand and solve the equation for P.+4 + 4 24 - 2P = 2P24 = 4P 4 46 = P+2P +2P 24 = 4P20 - 2P = -4 + 2P QD = 20 - 2P = 20 – 2(6) = 8Some notes on solving equationsa. add the same numberWe get equivalent equations if on both sidesof the equality sign we do the following:b. subtract the same numberc. multiply by the same number 0d. divide by the same number 0.Comparative Statics orWhat happens when things changeDemand ShiftsIncreases in demand (shifts to the right) will increase the equilibrium price and quantity.Decreases in demand (shifts to the left) will decrease the equilibrium price and quantity.Changes in Demand 02468101214160 5 10 15 20 25QuantityPriceD0S0D1D2Increases in supply (shifts to the right) will decrease the equilibrium price and increase the equilibrium quantity.Supply ShiftsDecreases in supply (shifts to the left) will increase the equilibrium price and decrease the equilibrium quantity.Changes in Supply024681012140 5 10 15 20QuantityPriceD0S0S1S2Price CeilingsA price ceiling occurs when some outside forcesets a price for the marketthat is below the equilibrium price.When quantity supplied & quantity demanded differ,the short side of the market — whichever of the two quantities is less — will prevail.Price Ceiling00.511.522.533.50 2000 4000 6000 8000 10000 12000QuantityPriceD0SS00QueuingQD (P) > QS (P)Supply DemandThe results:A black marketQueuing ShortagesPrice FloorsA price floor occurs when some outside forcesets a price for the marketthat is above the equilibrium price.When quantity supplied & quantity demanded differ,the short side of the market — whichever of the two quantities is less — will prevail.Price Floor00.511.522.533.50 2000 4000 6000 8000 10000 12000QuantityPriceD0SS00Excess SupplyQS (P) > QD (P)Supply DemandThe results:Excess supplyUnemploymentThe
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