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Equilibrium price and output: Equilibrium means that forces working on a variable are in balance so that there is no tendency for it to change; here it means prices of goods and the quantities exchanged between buyers and sellers. This will be achieved when quantity demanded equals quantity supplied
surplus (S > D)
price falls
Equilibrium Price
The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.
Characteristics of the equilibrium or market clearing price: QD = QS No shortage No excess supply No pressure on the price to change
20 40 60 80 100
700 (A) 500 (B) 350 (C) 200 (D) 100 (E)
100 (a) 200 (b) 350 (c) 530 (d) 700 (e)
(potatoes: monthly)
(a) Excess Demand d D Cc b
SHORTAGE (300 000) B
e Supply
80
60
40
a
20
A
Demand
Equilibrium
Shortage When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
E
(b) Excess Supply D SURPLUS (330 000)
e Supply
80
60
Cc
b
40
B A
Demand
a
20
Equilibrium
Surplus When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
E D
d
e Supply
80
60
40
B A
Demand
a
20
Qe
400
500
600
700
800
Pe 2 Pe 1
i g h
D2 D1
O Qe1 Qe2 Q
S2 S1 k
Pe 3 Pe 1
D
O Qe3 Qe1 Q
Supply
Rs2.00
Equilibrium price
Equilibrium
Equilibrium quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13
Demand
Supply Rs2.50 2.00 2. . . . resulting in a higher price . . . Initial equilibrium D D 0 3. . . . and a higher quantity sold. 7 10 Quantity of Ice-Cream Cones New equilibrium
Demand
The Effect on the Market for Tennis Balls of a Decline in Court Rental Fees
Price (Rs/ball)
1.40 1.00
D D
Quantity
40
58
Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet Access
Price (Rs/letter)
P P
D D
Quantity (letters/month)
Q Q
P P D D Q Q
apartments (units per month)
The Effect of the Release of Jurassic Park on the Market for Toy Dinosaurs
D = demand after release of movie Price
P P D
D Q Q
P P D D Q Q
Apple Computers (units per month)
P P D D Q Q
Housing (units per month)
S S
80 60
D
800 1000
Quantity (skateboards/month)
The Effect on the Market for New Houses of a Decline in Carpenters Wage Rates
Price (Rs1000/house)
S S
12 10
D
40 50
Quantity (houses/month)
Demand
Supply
At a price of Rs1.20, 6 million hours of internet time will be offered for sale and an equal amount purchased
0 1 2 3 4 5 6 7 8 9 10 11 12 13
1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05
Demand
At a price of Rs1.30, 7.8 million hours will be offered for sale but consumers are only willing to purchase hours Qs > Qd 4.2 million surplus of internet hours Supply
Surplus E
Rather than hold on to these hours sellers will offer to sell at lower prices with the result that more consumers enter the market price moves toward Rs1.20
0 1
4 5
7 8
9 10
11
12 13
At a price of Rs1.10, buyers want to buy 8.5 million hours but sellers are willing to offer only 3.6 million hours Qd shortage >Q Some buyers will be willing to pay more with the result that the price will increase and sellers will increase the amount they offer for sale move toward Rs1.20
0 1
Shortag e 4 5 6 7
9 10
11
12 13
House Prices: A case study in shifting demand curves Find out what has happened to house prices over the past three years. Attempt an explanation of what has happened
Case study
Adjusting to Oil Price Shocks Short run & long run demand & supply responses