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Chapter 3 - Supply and demand intertwined. After reading this chapter, you should be able to answer the following questions: How do supply and demand determine prices? What is equilibrium? What is surplus? What is shortage? What is the effect of a change in demand? What is the effect of a change in supply? | Chapter 3 Supply and Demand Intertwined McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives How do supply and demand determine prices? What is equilibrium? What is surplus? What is shortage? What is the effect of a change in demand? What is the effect of a change in supply? 3- $P .45 Quantity of Apples Demand When Supply and Demand Intersect Supply Quantity supplied at 0.45 Quantity demanded at 0.45 12,000 At $0.45: Consumers want 12,000 apples. Firms want to produce 12,000 apples. Quantity demanded = Quantity supplied. Supply and demand intersect. = Equilibrium 3- $P .70 Quantity of Apples Demand Surplus Supply Quantity supplied at 0.70 Quantity demanded at 0.70 10,000 14,600 At $0.70: Consumers want 10,000 apples. Firms want to produce 14,600 apples. Quantity supplied > quantity demanded = Surplus. Price will fall. 3- $P .25 Quantity of Apples Demand Shortage Supply Quantity supplied at 0.25 Quantity demanded at | Chapter 3 Supply and Demand Intertwined McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives How do supply and demand determine prices? What is equilibrium? What is surplus? What is shortage? What is the effect of a change in demand? What is the effect of a change in supply? 3- $P .45 Quantity of Apples Demand When Supply and Demand Intersect Supply Quantity supplied at 0.45 Quantity demanded at 0.45 12,000 At $0.45: Consumers want 12,000 apples. Firms want to produce 12,000 apples. Quantity demanded = Quantity supplied. Supply and demand intersect. = Equilibrium 3- $P .70 Quantity of Apples Demand Surplus Supply Quantity supplied at 0.70 Quantity demanded at 0.70 10,000 14,600 At $0.70: Consumers want 10,000 apples. Firms want to produce 14,600 apples. Quantity supplied > quantity demanded = Surplus. Price will fall. 3- $P .25 Quantity of Apples Demand Shortage Supply Quantity supplied at 0.25 Quantity demanded at 0.25 9,000 15,000 At $0.25: Firms want to produce 9,000 apples. Consumers want 15,000 apples. Quantity supplied 3- Equilibrium A market at equilibrium is stable unless disturbed by shift of supply or demand curves. A market not at equilibrium moves towards equilibrium with change in price. 3- Equilibrium Demand Supply Price Quantity Price above equilibrium = Surplus. Fall in price Price below equilibrium = Shortage. Rise in price Equilibrium quantity sold Equilibrium Equilibrium price 3- Do You Know? When does a surplus arise? When price is above equilibrium where quantity supplied exceeds quantity demanded. When does a shortage arise? When price is below equilibrium where quantity demanded exceeds quantity supplied. 3- Quantity Demand Moving Towards New Equilibrium An increase in supply: A new equilibrium at a lower price and a higher quantity. Old Supply Price New Supply Old equilibrium New equilibrium 3- Quantity .
