Changes in Market Equilibrium

1. Changes in Market Equilibrium Chapter 6, Section 2

2. Changes in Market Equilibrium When the supply or the demand curve shifts, a new equilibrium occurs. Then, the market price and quantity sold move toward the new equilibrium.

3. Excess Demand Excess demand leads firms to raise prices Higher prices lead to more quantity supplied The quantity demanded falls until the two values (price and quantity demanded) are equal

4. Excess Supply Excess supply will force firms to cut prices. Falling prices will cause quantity demanded to rise and quantity supplied to fall until they are equal.

5. Changes in Prices • Factors that shift the supply curve to the left or right include: • Advances in technology • New government taxes / subsidies • Changes in price of raw material / labor

6. Changes in Prices • Equilibrium occurs at the intersection of the demand curve and supply curve. • Therefore, • A shift in the demand curve or the supply curve will change the equilibrium price. • A functioning market will carefully balance supply and demand.

7. Chapter 6, Section 3: Roles of Prices In a free market, prices are a tool for distributing goods and resources throughout the economy. Price is a language both sellers and buyers understand. It is a way of putting a standard measure of value on a good or service.

8. Roles of Prices, cont. • Prices give the consumers and producers incentives. • When prices are low, the consumer has the incentive to buy more. • When prices are high, the producer has the incentive to produce more.

9. Roles of Prices, cont. • Prices are very flexible and can easily be changed to solve the problem of excess demand or excess supply. • Prices can be raised to solve the problem of excess demand. • Prices can be lowered to solve the problem of excess supply.

10. Supply Shock • Supply shock is a sudden shortage of a good. Suppliers can no longer meet the needs of consumers. • Solution 1: Increase supply -- the problem is it might take some time. • Solution 2: Rationing – Dividing up goods or services and distributing them using criteria other than price. This might also take time.

11. Wide Choice of Goods One benefit of a market- based economy is the diversity of goods and services consumers can buy. Price allows the consumers to choose among similar goods.

12. The Black Market • The Black Market is a market in which goods and services are sold illegally. • Usually a consequence of rationing. • Consumers pay more so they can buy a good when rationing makes it otherwise unavailable. • The Black Market can also allow consumers to buy goods cheaper because there are no government taxes on these goods.

13. Efficient Resource Allocation A free market allows resources to be utilized efficiently. Land, labor and capital will be used for their most valuable purposes.

14. Market Problems • Imperfect Competition: Only a few firms providing a good or service • Spillover Costs (Externalities): Costs of production • Air pollution • Water pollution • Imperfect Information: Consumers and/or producers do not have enough information to make informed choices about a product • Buying a car