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Supply and DemandMarket Price and Output
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Lesson Objectives
• To understand and be able to illustrate a market
• To be able to illustrate and explain market equilibrium and how this changes
• To e able to explain disequilibrium and the concept of market forces and the price mechanism
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• A market is defined as a place where buyers and sellers meet to exchange goods and services
• Examples of markets?• Markets are illustrated using supply and
demand curves together.
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Equilibrium• When a market is in equilibrium it
means it is in a state of balance.• Market equilibrium occurs where supply
equals demand.• When planned supply meets planned
demand we can determine the equilibrium price (known as the ‘market price’) and the equilibrium quantity traded in a market.
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S1
D1
Qe
PeE
Price
Quantity
Equilibrium Price= Pe (market price)Equilibrium Output= Qe
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• Assuming markets are competitive and consumers and producers follow their self interests (utility and profit maximisers) then scarce resources can be allocated efficiently via the price mechanism
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Disequilibrium
• When demand and supply are not equal a state of disequilibrium will occur
• Market forces (the ‘invisible hand’) should move price back to it’s equilibrium
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S1
D1
Qe
PeE
Price
Quantity
P1
P2
Excess Supply
Excess Demand
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• Excess supply- producers have to lower prices to sell output. This downward pressure on price is sometimes known as a ‘buyers market’
• Excess demand- prices are ‘bid up’- ‘sellers market’The price mechanism ensures that a free market (a market with no government intervention) will always end up in equilibrium
Read handoutThe Functions of Price and the Allocation of
Scarce Resources
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Recall
• What factors cause a shift in demand?
• What factors cause a shift in supply?
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Effect of an Increase in Demand
• Time periods–Momentary- supply is fixed– Short-run- the interval which must
elapse before more can be supplied with existing capacity. At least one factor of production will remain fixed
– Long run- the time interval long enough to change all factors of production
–Now illustrate on your handouts
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Momentary Period- Supply is fixed
D1
Q1
P1
Price
Quantity
D2
Sm
Pm
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Short run
S1
D1
Q1
P1
Price
Quantity
D2
P2
Q2
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In the long run- new firms enter industry attracted by the new higher equilibrium price
S1
D1
Q1
P1
Price
Quantity
D2
Q2
S2
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Effect of an increase in supply
• In the short run, ceteris paribus, an increase in supply will lower the price, this in turn will cause an extension in demand
• Illustrate using a diagram
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S1
D1
Q2
P2
Price
Quantity
S2
P1
Q1
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S1
D1
Q2
P2
Price
Quantity
S2
P1
Q1
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S1
D1
Q2
P2
Price
Quantity
S2
P1
Q1
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Price Elasticity of supply and demand
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On your worksheet…• Illustrate- If Supply is inelastic what happens to
equilibrium price and quantity when there is an increase in demand?
• Illustrate- If Supply is inelastic what happens to equilibrium price and quantity when there is an increase in demand?
• Illustrate- If Demand is inelastic what happens to equilibrium price and quantity when there is an increase in supply?
• Illustrate- If Demand is elastic what happens to equilibrium price and quantity when there is an increase in supply?
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Handout Activities…
• Multiple Choice Handout• Supply and Demand Worksheet 1• Supply and Demand Worksheet 2
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Producer and Consumer Surplus
Illustrate on a diagram…
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QuantityQ
Price
Producer Surplus
P
D
Consumer Surplus
E
S
A
B
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S1
D1
Q1
P1
Price
Quantity
D2
P2
Q2