Section 2: Changes in Market equilibrium

1. Chapter 6 Section 2: Changes in Market equilibrium

2. Why does the market tend towards equilibrium? • Excess demand leads firms to raise prices, higher prices induce the quantity supplied to rise & the quantity demanded to fall until the two are equal

3. Excess supply will force firms to cut prices & falling prices cause quantity demanded to rise & quantity supplied to fall until they are equal

4. Changes in Price • Shifts in the supply curve caused by advances in technology, new government taxes & subsidies, & changes in the price of raw materials & labor • Shift in the supply curve will change the equilibrium price & quantity

5. Understanding a Shift in Supply • As firms develop better technology for producing a good, the price falls

6. Finding a New Equilibrium • Lower costs shift the supply curve to the right where at each price, producers are willing to supply a larger quantity • Surplus- when quantity supplied exceeds quantity demanded

7. Changing Equilibrium • Not usually an unchanging, single point on a graph • Follows the intersection of the demand & supply curves as that point moves downward along the demand curve

8. A Fall in Supply • When the supply curves shifts to the left, the equilibrium price & quantity sold will change as well • As the supply curve shifts to the left, suppliers raise their prices & the quantity demanded falls

9. New equilibrium price will be above & to the left of the original • Market price higher, quantity sold is lower

10. Shifts in Demand • The problem of excess demand • Fad causes a sudden increase in market demand, & demand curve shifts to the right • Leads to excess demand (shortage) • Appears as empty shelves & long lines

11. Leads to search costs • What are search costs? • Available products must be rationed

12. Return to Equilibrium • As time passes, firms will raise prices • Eventually price equals quantity demanded

13. A Fall in Demand • What causes a fall in demand? • Excess demand turns into excess supply • Demand curve shifts to the left & prices cut

14. Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph A: A Change in Supply Graph B: A Change in Demand $800 $600 $400 $200 0 $60 $50 $40 $30 $20 $10 Supply a b Original supply c c Price Price a b New demand New supply Demand Original demand 0 1 2 3 4 5 100 200 300 400 500 600 700 800 900 Output (in millions) Output (in thousands) Analyzing Shifts in Supply & Demand Graph B shows how the market finds a new equilibrium when there is an increase in demand.