Econ 101:
Microeconomics
Chapter 3:
Supply and Demand
Part 2
Equilibrium: Putting Supply and
Demand Together



When a market is in equilibrium
•
Both price of good and quantity bought and sold have
settled into a state of rest
Equilibrium price, p*, is a “Market clearing” price:
•
Price at which quantity supplied ________________
quantity demanded. This quantity is called the Equilibrium
quantity, Q*.
The equilibrium price and equilibrium quantity
can be found on the _________ and _________
axes, respectively
• At point where supply and demand curves cross
Market Equilibrium
Supply
Price
Equilibrium
E
P*
Demand
Q*
Equilibrium price (p*) : the price that “balances” quantity supplied
and quantity demanded.
Quantity
Excess Demand
S
Price
E
p*
J
H
p1
Excess Demand
Q1
Q*
Q2
D
Quantity
Suppose price starts out below the equilibrium level:
Disappointed demanders will bid up the price, driving price
up toward equilibrium.
Excess Demand

Excess demand
• At a given price, the excess of quantity
demanded over quantity supplied

Price of the good will rise as buyers
compete with each other to get more of
the good than is available
Excess Supply
S
Price
Excess Supply
p1
L
K
E
p*
D
Q1
Q*
Q2
Quantity
Suppose price starts out above the equilibrium level:
Disappointed supplier will undercut rivals’ prices, driving
price down toward equilibrium.
Excess Supply

Excess Supply
• At a given price, the excess of quantity
supplied over quantity demanded

Price of the good will fall as sellers
compete with each other to sell more of
the good than buyers want
Income Rises: What Happens
When Things Change

Income rises, causing ___________ in
demand
• __________ shift in the demand curve causes
•

_________ movement along the supply curve
Equilibrium price and equilibrium quantity both
_________
Shift of one curve causes a movement
along the other curve to new equilibrium
point
Increase in Income
Price per
Bottle
4. Equilibrium
price
increases
3. to a new
equilibrium.
S
$4.00
3.00
2. moves us along
the supply
curve . . .
F'
E
1. An increase in
demand . . .
D2
D1
5. and equilibrium quantity
increases too.
50,000 60,000
Number of Bottles of
Maple Syrup per Period
An Ice Storm Hits: What Happens When
Things Change

An ice storm causes _________ in
_______
• Weather is
_________ variable for _______
curve
• Any change that shifts the supply curve leftward in
a market will increase the equilibrium price
• And decrease the equilibrium quantity in that market
A Shift of Supply and A New Equilibrium
Price per
Bottle
$5.00
3.00
S2
S1
E'
E
D
35,000 50,000
Number of Bottles
Changes in the Market for Handheld PCs
Price per
Handheld
PC
3. moved the market to
a new equilibrium.
2. and a decrease
in demand . . .
4. Price
decreased . . .
A
$500
B
S2002
S2003
1. An increase in
supply . . .
$400
D2002
5. and quantity
decreased as well.
D2003
2.45 3.33
Millions of Handheld PCs
per Quarter
Both Curves Shift


When just one curve shifts (and we know the
direction of the shift) we can determine the
direction ___________________________
____________________
When both curves shift (and we know the
direction of the shifts) we can determine the
direction ____________________________
______________________
•
Direction of the other will depend on which curve shifts
by more
The Three Step Process



Key Step 1—Characterize the Market
•
Decide which market or markets best suit problem being
analyzed and identify decision makers (buyers and sellers)
who interact there
Key Step 2—Find the Equilibrium
•
Describe conditions necessary for equilibrium in the market,
and a method for determining that equilibrium
Key Step 3—What Happens When Things Change
•
Explore how events or government polices change market
equilibrium
Using Supply and Demand:
The Invasion of Kuwait

Why did Iraq’s invasion of Kuwait cause
the price of oil to rise?
• Immediately after the invasion, United States
•
led a worldwide embargo on oil from both Iraq
and Kuwait
A significant decrease in the oil industry’s
productive capacity caused a shift in the
supply curve to the left
• Price of oil increased
The Market For Oil
Price per
Barrel of Oil
S2
S1
E'
P2
E
P1
D
Q2
Q1
Barrels of Oil
Using Supply and Demand:
The Invasion of Kuwait

Why did the price of natural gas rise as
well?
• Oil is a substitute for natural gas
• Rise in the price of a substitute increases
•
demand for a good
Rise in price of oil caused demand curve for
natural gas to shift to the right
• Thus, the price of natural gas rose
The Market For Natural Gas
Price per Cubic
Foot of Natural
Gas
S
F'
P4
F
D2
P3
D1
Q3
Q4
Cubic Feet of
Natural Gas