Supply and Demand together at last!

SUPPLY and demand• These two laws are directly contrary to each

other. If suppliers want high prices, but buyers want low

prices, how on earth does anything get traded?

• The point where:quantity supplied = quantity demanded

supply demand

Supply and demand

• Market Equilibrium (aka market clearing price)• The point at which sellers are willing to sell as

much as buyers are willing to buy• Qd=Qs

EOC study guideSupply & Demand #4

Moving Toward Equilibrium

• Surplus is the condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above equilibrium.

• Shortage is the condition in which the quantity demanded of a good is greater than the quantity supplied. Shortage occur only at prices below equilibrium price.

EOC study guideSupply & Demand #7

Supply and Demand Interactions

Relationship of quantity suppliedMarket

(Qs) to quantity demanded (Qd) Condition

Qs Qd Surplus

Qd Qs Shortage

Qd = Qs

Equilibrium

Supply and demand

• Equilibrium or market clearing price• How difficult is it to find this point?

• It is the single most difficult aspect of business

• All trial and error

• “In the Chips” Activity• You will need a piece of paper and a pencil

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

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P

Q

D S

Surplus (a.k.a. excess supply):when quantity supplied is greater than quantity demanded

SurplusExample: If P = $5,

then QD = 9 lattes

and QS = 25 lattes

resulting in a surplus of 16 lattes

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Surplus (a.k.a. excess supply):

Facing a surplus, sellers try to increase sales by cutting price.

This causes QD to rise

Surplus

…which reduces the surplus.

and QS to fall…

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$6.00

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Surplus (a.k.a. excess supply):

Facing a surplus, sellers try to increase sales by cutting price.

This causes QD to rise and QS to fall.

Surplus

Prices continue to fall until market reaches equilibrium.

What happens to price when there is a surplus?

• Surplus• Suppliers cannot sell all of their goods• Inventory grows• Expensive to store

• What happens to price?

• It lowers to the equilibrium price

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Shortage (a.k.a. excess demand):

when quantity demanded is greater than quantity supplied

Example: If P = $1,

then QD = 21 lattes

and QS = 5 lattes

resulting in a shortage of 16 lattes

Shortage

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Shortage (a.k.a. excess demand):

Facing a shortage, sellers raise the price,

causing QD to fall

…which reduces the shortage.

and QS to rise,

Shortage

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

0 5 10 15 20 25 30 35

P

Q

D S

Shortage (a.k.a. excess demand):

Facing a shortage, sellers raise the price,

causing QD to falland QS to rise.

Shortage

Prices continue to rise until market reaches equilibrium.

What happens to price when there is a shortage?

• Shortage• Price is below equilibrium causing a high

demand for the good and a low supply• Buyers will pay higher prices for goods• Higher prices motivate suppliers to

produce more

• Price will rise until it reaches equilibrium