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MACROECONOMICS 231

MACROECONOMICS 231. TOPIC #3. SUPPLY and DEMAND. Market Equilibrium. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. Equilibrium price is the price at which quantity demanded equals quantity supplied.

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MACROECONOMICS 231

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  1. MACROECONOMICS 231

  2. TOPIC #3 SUPPLY and DEMAND

  3. Market Equilibrium • Equilibrium in a market occurs when the price balances the plans of buyers and sellers. • Equilibrium price is the price at which quantity demanded equals quantity supplied. • Equilibrium quantity is the quantity bought and sold at the equilibrium price.

  4. Market Equilibrium • Price as a Regulator • If the price is too low, quantity demanded exceeds quantity supplied. • If the price is too high, quantity supplied exceeds quantity demanded.

  5. Market Equilibrium Quantity Quantity Shortage(–) Pricedemanded supplied or surplus(+) (dollars per tape)(millions of tapes per week) 1 9 0 2 6 3 3 4 4 4 3 5 5 2 6

  6. Market Equilibrium Quantity Quantity Shortage(–) Pricedemanded supplied or surplus(+) (dollars per tape)(millions of tapes per week) 1 9 0 –9 2 6 3 –3 3 4 4 0 4 3 5 +2 5 2 6 +4

  7. Market Equilibrium 6 5 Price (dollar per tape) 4 3 2 1 0 2 4 6 8 10 Quantity (millions of tapes per week)

  8. Market Equilibrium 6 5 Price (dollar per tape) 4 3 2 Demand for tapes 1 0 2 4 6 8 10 Quantity (millions of tapes per week)

  9. Market Equilibrium 6 Supply of Tapes 5 Price (dollar per tape) 4 3 2 Demand for tapes 1 0 2 4 6 8 10 Quantity (millions of tapes per week)

  10. Equilibrium Market Equilibrium 6 Supply of Tapes 5 Price (dollar per tape) 4 3 2 Demand for tapes 1 0 2 4 6 8 10 Quantity (millions of tapes per week)

  11. Equilibrium Market Equilibrium Surplus of 2 million tapes at $4 a tape 6 Supply of Tapes 5 Price (dollar per tape) 4 3 2 Demand for tapes 1 0 2 4 6 8 10 Quantity (millions of tapes per week)

  12. Market Equilibrium Surplus of 2 million tapes at $4 a tape 6 Supply of Tapes 5 Price (dollar per tape) 4 Equilibrium 3 2 Demand for tapes 1 Shortage of 3 million tapes at $2 a tape 0 2 4 6 8 10 Quantity (millions of tapes per week)

  13. Market Equilibrium • Price Adjustments • A shortage forces the price up. • A surplus forces the price down. • Such price changes are mutually beneficial to both buyers and sellers.

  14. Predicting Changes in Price and Quantity • A Change in Demand • What would happen to the price and quantity of tapes if the price of a Walkman falls from $200 to $50.

  15. The Effects of a Change in Demand Quantity demanded Price (millions of tapes per week) (dollars Quantity supplied per tape ) Walkman $200 Walkman $50 (millions of tapes per week) 1 9 0 2 6 3 3 4 4 4 3 5 5 2 6

  16. The Effects of a Change in Demand Quantity demanded Price (millions of tapes per week) (dollars Quantity supplied per tape ) Walkman $200 Walkman $50 (millions of tapes per week) 1 9 13 0 2 6 10 3 3 4 8 4 4 3 7 5 5 2 6 6

  17. The Effects of a Change in Demand Supply of tapes 6 5 Price (dollar per tape) 4 3 2 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  18. The Effects of a Change in Demand Supply of tapes 6 5 Price (dollar per tape) 4 3 2 Demand for tapes (Walkman $50) 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  19. The Effects of a Change in Demand Supply of tapes 6 5 Price (dollar per tape) 4 3 2 Demand for tapes (Walkman $50) 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  20. A Change in Demand • Prediction • When demand increases, both the price and quantity increase. • When demand decreases, both the price and quantity decrease.

  21. Predicting Changes in Price and Quantity • A Change in Supply • What would happen to the price and quantity of tapes if a new cost-saving production technology was developed?

  22. The Effects of a Change in Supply Quantity supplied Price(millions of tapes per week) (dollarsQuantity demandedold new per tape ) (millions of tapes per week)technology technology 1 9 0 2 6 3 3 4 4 4 3 5 5 2 6

  23. The Effects of a Change in Supply Quantity supplied Price(millions of tapes per week) (dollarsQuantity demandedold new per tape ) (millions of tapes per week)technology technology 1 9 0 3 2 6 3 6 3 4 4 8 4 3 5 10 5 2 6 12

  24. The Effects of a Change in Supply Supply of tapes (old technology) 6 5 Price (dollar per tape) 4 3 2 1 Demand for tapes 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  25. The Effects of a Change in Supply Supply of tapes (old technology) Supply of tapes (new technology) 6 5 Price (dollar per tape) 4 3 2 1 Demand for tapes 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  26. The Effects of a Change in Supply Supply of tapes (old technology) Supply of tapes (new technology) 6 5 Price (dollar per tape) 4 3 2 1 Demand for tapes 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  27. A Change in Supply • Prediction • When supply increases, the quantity increases and the price falls. • When supply decreases, the quantity decreases and the price rises

  28. Predicting Changes in Price and Quantity • A Change in Both Demand and Supply • What would happen if both demand and supply change together?

  29. The Effects of an Increase in Both Demand and Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) PriceQuantityQuantity QuantityQuantity (dollarsdemandedsupplieddemandedsupplied per tape ) Walkman old Walkman new $200 technology$50 technology 1 9 0 2 6 3 3 4 4 4 3 5 5 2 6

  30. The Effects of an Increase in Both Demand and Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) PriceQuantityQuantity QuantityQuantity (dollarsdemandedsupplieddemandedsupplied per tape ) Walkman old Walkman new $200 technology$50 technology 1 9 0 13 3 2 6 3 10 6 3 4 4 8 8 4 3 5 7 10 5 2 6 6 12

  31. The Effects of an Increase in Both Demand and Supply Supply of tapes (old technology) 6 5 Price (dollar per tape) 4 3 2 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  32. The Effects of an Increase in Both Demand and Supply Supply of tapes (old technology) 6 5 Price (dollar per tape) 4 3 Demand for tapes (Walkman $50) 2 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  33. The Effects of an Increase in Both Demand and Supply Supply of tapes (old technology) Supply of tapes (new technology) 6 5 Price (dollar per tape) 4 3 Demand for tapes (Walkman $50) 2 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  34. A Change in Both Demand and Supply • Prediction • When both demand and supply increase, the quantity increases and the price decreases, or remains constant. • When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.

  35. The Effects of an Decrease in Demand and an Increase in Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) PriceQuantityQuantity QuantityQuantity (dollarsdemandedsupplieddemandedsupplied per tape ) CD player old CD player new $400 technology$200 technology 1 13 0 2 10 3 3 8 4 4 7 5 5 6 6

  36. The Effects of an Decrease in Demand and an Increase in Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) PriceQuantityQuantity QuantityQuantity (dollarsdemandedsupplieddemandedsupplied per tape ) CD player old CD player new $400 technology$200 technology 1 13 0 9 3 2 10 3 6 6 3 8 4 4 8 4 7 5 3 10 5 6 6 2 12

  37. The Effects of an Decrease in Demand and an Increase in Supply Supply of tapes (old technology) 6 5 Price (dollar per tape) 4 3 Demand for tapes (CD player $400) 2 1 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  38. The Effects of an Decrease in Demand and an Increase in Supply Supply of tapes (old technology) 6 5 Price (dollar per tape) 4 3 Demand for tapes (CD player $400) 2 1 Demand for tapes (CD player $400) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  39. The Effects of an Decrease in Demand and an Increase in Supply Supply of tapes (old technology) 6 5 Price (dollar per tape) Supply of tapes (new technology) 4 3 Demand for tapes (CD player $400) 2 1 Demand for tapes (CD player $400) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)

  40. The Effects of a Decrease in Demand and an Increase in Supply • Prediction • When demand decreases and supply increases, the price falls and the quantity increases, decreases, or remains constant. • When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.

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