Chapter 2

Chapter 2
The Basics of Supply and Demand
Topics to Be Discussed
Supply and Demand
The Market Mechanism

Changes in Market Equilibrium
Elasticities of Supply and Demand

Short-Run Versus Long-Run Elasticities
Chapter 2: The Basics of Supply and Demand
Slide 2
Topics to Be Discussed
Understanding and Predicting the Effects of Changing Market Conditions Effects of Government Intervention--Price Controls
Slide 3
Introduction
Applications of Supply and Demand Analysis
Understanding and predicting how world economic conditions affect market price and production Analyzing the impact of government price controls, minimum wages, price supports, and production incentives
Slide 4
Introduction
Applications of Supply and Demand Analysis
Analyzing how taxes, subsidies, and import restrictions affect consumers and producers
Slide 5
Supply and Demand
The Supply Curve
The supply curve shows how much of a good producers are willing to sell at a given price, holding constant other factors that might affect quantity supplied
Slide 6
Supply and Demand
The Supply Curve
This price-quantity relationship can be shown by the equation:
Qs QS ( P )
Slide 7
Supply and Demand

Price ($ per unit) Vertical axis measures price (P) received per unit in dollars
The Supply Curve Graphically
Horizontal axis measures quantity (Q) supplied in number of units per time period Quantity Chapter 2: The Basics of Supply and Demand Slide 8
Supply and Demand

Price ($ per unit)
The Supply Curve Graphically
P2 P1
The supply curve slopes upward demonstrating that at higher prices firms will increase output
Q1
Q2
Quantity Slide 9
Supply and Demand
Non-price Determining Variables of Supply
Costs of Production
Labor
Capital
Raw Materials
Slide 10
Supply and Demand

Change in Supply
The cost of raw materials falls

At P1, produce Q2 At P2, produce Q1 P1
Supply curve shifts right to S

More produced at any price on S than on S
P2
Q0
Q1
Q2
Slide 11
Supply and Demand
Supply - A Review
Supply is determined by non-price supplydetermining variables as such as the cost of labor, capital, and raw materials. Changes in supply are shown by shifting the entire supply curve.
Slide 12
Supply and Demand
Supply - A Review
Changes in quantity supplied are shown by movements along the supply curve and are caused by a change in the price of the product.
Slide 13
Supply and Demand
The Demand Curve
The demand curve shows how much of a good consumers are willing to buy as the price per unit changes holding non-price factors constant.
This price-quantity relationship can be shown by the equation:
QD QD(P)
Chapter 2: The Basics of Supply and Demand Slide 14
Supply and Demand

Price ($ per unit)
Vertical axis measures price (P) paid per unit in dollars
Horizontal axis measures quantity (Q) demanded in number of units per time period
Quantity
Supply and Demand

Price ($ per unit) The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper and the consumers real income increases.
D Quantity
Supply and Demand
Non-price Determining Variables of Demand

Income Consumer Tastes
Price of Related Goods

Substitutes Complements
Slide 17
Supply and Demand

Change in Demand
Income Increases

P P2
At P1, produce Q2 At P2, produce Q1
Demand Curve shifts right P1 More purchased at any price on D than on D
Q0
Q1
Q2
Slide 18
Shifts in Supply and Demand
Demand - A Review
Demand is determined by non-price demand-determining variables, such as, income, price of related goods, and tastes. Changes in demand are shown by shifting the entire demand curve.
Changes in quantity demanded are shown by movements along the demand curve.
Slide 19

Price ($ per unit)
S
The curves intersect at equilibrium, or marketclearing, price. At P0 the quantity supplied is equal to the quantity demanded at Q0 .
P0
Q0
Quantity
Slide 20
Characteristics of the equilibrium or market clearing price:

QD No
= QS shortage
No
No
excess supply
pressure on the price to change
Slide 21

Price ($ per unit)
Surplus
P1 P0
If price is above equilibrium:
1) Price is above the market clearing price 2) Qs > Qd 3) Price falls to the market-clearing price
Q0
Quantity
Slide 22

A Surplus
The market price is above equilibrium

There is excess supply Producers lower prices Quantity demanded increases and quantity supplied decreases The market continues to adjust until the equilibrium price is reached.
Slide 23

Price ($ per unit)
Surplus
P1 P2
Assume the price is P1 , then: 1) Qs : Q1 > Qd : Q2 2) Excess supply is Q1:Q2. 3) Producers lower price. 4) Quantity supplied decreases and quantity demanded increases. 5) Equilibrium at P2Q3
D Q1 Q3 Q2 Quantity
Slide 24

Surplus - Review:
The market price is above equilibrium:
There is excess supply

Producers lower prices Quantity demanded increases and quantity supplied decreases The market continues to adjust until the equilibrium price is reached
Slide 25

Price ($ per unit)
P3
P2
Assume the price is P2 , then: 1) Qd : Q2 > Qs : Q1 2) Shortage is Q1:Q2. 3) Producers raise price. 4) Quantity supplied increases and quantity demanded decreases. 5) Equilibrium at P3, Q3
Shortage
Q1 Q3
D
Q2 Quantity
Slide 26

Shortage
The market price is below equilibrium:

There is a shortage Producers raise prices Quantity demanded decreases and quantity supplied increases The market continues to adjust until the new equilibrium price is reached.
Slide 27
Market Mechanism Summary
1) Supply and demand interact to determine the market-clearing price.

2) When not in equilibrium, the market will adjust to alleviate a shortage or surplus and return the market to equilibrium.
3) Markets must be competitive for the mechanism to be efficient.

Changes In Market Equilibrium
Equilibrium prices are determined by the relative level of supply and demand. Supply and demand are determined by particular values of supply and demand determining variables. Changes in any one or combination of these variables can cause a change in the equilibrium price and/or quantity.
Slide 29
Raw material prices fall
S shifts to S
Surplus @ P1 of Q 1, Q 2 Equilibrium @ P3, Q3
P1 P3
Q1 Q3 Q2
Income Increases
Demand shifts to D1
Shortage @ P1 of Q1, Q2 P3 Equilibrium @ P3, Q3
P1
Q2 Q1 Q3
Income Increases & raw material prices fall
The increase in D is greater than the increase in S Equilibrium price and quantity increase to P2, Q2
P2 P1
Q1
Q2
Slide 32
Shifts in Supply and Demand
When supply and demand change simultaneously, the impact on the equilibrium price and quantity is determined by:
1) The relative size and direction of the change
2) The shape of the supply and demand models
Slide 33
The Price of Eggs and the Price of a College Education Revisited
The real price of eggs fell 59% from 1970 to 1998. Supply increased due to the increased mechanization of poultry farming and the reduced cost of production. Demand decreased due to the increasing consumer concern over the health and cholesterol consequences of eating eggs.
Slide 34
Market for Eggs

P
(1970
dollars per dozen)
S1970
Prices fell until a new equilibrium was reached at $0.26 and a quantity of 5,300 million dozen
S1998
$0.61
$0.26
D1970
5,300 5,500 Chapter 2: The Basics of Supply and Demand
D1998 Q (million dozens)

Slide 35
The Price of a College Education
The real price of a college education rose 68 percent from 1970 to 1995. Supply decreased due to higher costs of equipping and maintaining modern classrooms, laboratories and libraries, and higher faculty salaries. Demand increased due a larger percentage of a larger number of high school graduates attending college.
Slide 36
Market for a College Education

P
(annual cost
in 1970 dollars)
S1995
Prices rose until a new equilibrium was reached at $4,573 and a quantity of 12.3 million students
$4,248
S1970
$2,530
D1970
8.6 14.9
D1995
Q (millions of students enrolled))

Slide 37
Wage Inequality in the United States

Real
after-tax income from 1977 to 1999:
Rose 40+% for the top 20% of the income distribution Fell 10+% for the bottom 20%
Slide 38
Question
Why
did the income distribution become more unequal for 1977 to 1999?
Slide 39
Consumption & Price of Copper 1880-1998
Slide 40
The Long-Run Behavior of Natural Resource Prices
Observations
Consumption of copper has increased about a hundred fold from 1880 through 1998 indicating a large increase in demand. The real price for copper has remained relatively constant.
Slide 41

Price
S1900
S1950
S1998
Long-Run Path of Price and Consumption
D1900
D1950
D1998
Slide 42
Quantity
Conclusion
Decreases in the costs of production have increased the supply by more than enough to offset the increase in demand.
Slide 43
Observation
To accurately predict the future price of a product or service, it is necessary to consider the potential change in supply and demand. 1970 predictions for oil and other minerals proved incorrect because they only considered the demand side of the market.
Slide 44
Generally, elasticity is a measure of the sensitivity of one variable to another. It tells us the percentage change in one variable in response to a one percent change in another variable.
Slide 45

Price Elasticity of Demand
Measures the sensitivity of quantity demanded to price changes.
It measures the percentage change in the quantity demanded for a good or service that results from a one percent change in the price.
Slide 46
The price elasticity of demand is:
EP (%Q)/(%P)
Slide 47

The percentage change in a variable is the absolute change in the variable divided by the original level of the variable.
Slide 48

So the price elasticity of demand is also:
Q/Q P Q EP P/P Q P
Slide 49
Interpreting Price Elasticity of Demand Values

1) Because of the inverse relationship between P and Q; EP is negative. 2) If EP > 1, the percent change in quantity is greater than the percent change in price. We say the demand is price elastic.
Slide 50
Interpreting Price Elasticity of Demand Values 3) If EP < 1, the percent change in quantity is less than the percent change in price. We say the demand is price inelastic.
Slide 51

The primary determinant of price elasticity of demand is the availability of substitutes.
Many substitutes demand is price elastic

Few substitutes demand is price inelastic
Slide 52
Price Elasticities of Demand

Price 4 Q = 8 - 2P
EP -
The lower portion of a downward sloping demand curve is less elastic than the upper portion.
Ep = -1 2 Linear Demand Curve Q = a - bP Q = 8 - 2P Ep = 0 4

Q
Slide 53

Price
Infinitely Elastic Demand
P*
EP -
Quantity

Completely Inelastic Demand
Price
EP 0
Q*
Quantity
Slide 55

Other Demand Elasticities
Income elasticity of demand measures the percentage change in quantity demanded resulting from a one percent change in income.
Slide 56

The income elasticity of demand is:
Q/Q I Q EI I/I Q I

Cross elasticity of demand measures the percentage change in the quantity demanded of one good that results from a one percent change in the price of another good. For example consider the substitute goods, butter and margarine.
Slide 58
The cross elasticity of demand is:
Qb/Qb Pm Qb EQbPm Pm/Pm Qb Pm
The cross elasticity for substitutes is positive, while that for complements is negative.
Slide 59

Elasticities of Supply
Price elasticity of supply measures the percentage change in quantity supplied resulting from a 1 percent change in price. The elasticity is usually positive because price and quantity supplied are directly related.
Slide 60

Elasticities of Supply
We can refer to elasticity of supply with respect to interest rates, wage rates, and the cost of raw materials.
Slide 61

The Market for Wheat
1981 Supply Curve for Wheat

QS
= 1,800 + 240P
1981 Demand Curve for Wheat

QD
= 3,550 - 266P
Slide 62

Equilibrium: Q S = Q D
1,800 240P 3,550 266P 506P 1,750
P 3.46 / bushel
Q 1,800 (240)(3.46) 2,630 million bushels

P QD 3.46 E (2.66 ) .035 Inelastic Q P 2,630

D P
P QS 3.46 E (2.40 ) .032 Inelastic Q P 2,630

S P

Assume the price of wheat is $4.00/bushel

QD 3,550 (266 )( 4.00 ) 2,486
4.00 Q (266 ) 0.43 2,486

D P
Slide 65
Changes in the Market: 1981-1998

Supply (Qs) Demand (QD)

1981 1800 + 240P 3550 - 266P
Equilibrium Price (Qs = QD)

1800+240P = 3550-266P 506P = 1750 P1981 = $3.46/bushel 1,944+207P = 3,244-283P P1998 = $2.65/bushel
1998
1,944 + 207P
3,244 - 283P
Slide 66

Demand
Price elasticity of demand varies with the amount of time consumers have to respond to a price.
Slide 67

Demand
Most goods and services:
Short-run elasticity is less than long-run elasticity. (e.g. gasoline, Drs.)
Other Goods (durables):
Short-run elasticity is greater than long-run elasticity (e.g. automobiles)
Slide 68
Gasoline: Short-Run and Long-Run Demand Curves

Price
DSR
People tend to drive smaller and more fuel efficient cars in the long-run
Gasoline
DLR
Quantity
Automobiles: Short-Run and Long-Run Demand Curves

Price
DLR
People may put off immediate consumption, but eventually older cars must be replaced.
Automobiles
DSR
Quantity

Income Elasticities
Income elasticity also varies with the amount of time consumers have to respond to an income change.
Slide 71

Income Elasticities
Income elasticity is greater in the long-run than in the short run.

Higher
incomes may be converted into bigger cars so the income elasticity of demand for gasoline increases with time.
Slide 72

Income Elasticities
Other Goods (durables):
Income elasticity is less in the long-run than in the short-run.

Originally,
consumers will want to hold
more cars.
Later,
purchases will only to be to replace old cars.
Slide 73

The Demand for Gasoline and Automobiles
Gasoline and automobiles are complementary goods.
Slide 74

Gasoline
The long-run price and income elasticities are larger than the short-run elasticities.
Automobiles
The long-run price and income elasticities are smaller than the short-run elasticities.
Slide 75

The Demand for Gasoline
Years Following Price or Income Change Elasticity 1 2 3 4 5 6
Price
Income
-0.11 -0.22 -0.32 -0.49 -0.82 -1.17

0.07 0.13 0.20 0.32 0.54 0.78
Slide 76

The Demand for Automobiles
Years Following Price or Income Change

Elasticity Price Income 1 2 3 4 5 6
-1.20 -0.93 -0.75 -0.55 -0.42 -0.40 3.00 2.33 1.88 1.38 1.02 1.00
Slide 77

Data Explains:
1) Why the price of oil did not continue to rise above $30/barrel even though it rose very rapidly in the early 1970s. 2) Why automobile sales are so sensitive to the business cycle.

Supply
Long-run price elasticity of supply is greater than short-run price elasticity of supply.
Other Goods (durables, recyclables):
Long-run price elasticity of supply is less than short-run price elasticity of supply
Slide 79

Primary Copper: Short-Run and Long-Run Supply Curves Price
SSR SLR
Due to limited capacity, firms are limited by output constraints in the short-run. In the long-run, they can expand.
Quantity

Secondary Copper: Short-Run and Long-Run Supply Curves Price
SLR
SSR
Price increases provide an incentive to convert scrap copper into new supply. In the long-run, this stock of scrap copper begins to fall.
Quantity

Supply of Copper
Price Elasticity of:
Short-run
Long-run
Primary supply
Secondary supply Total supply
0.20
0.43 0.25
1.60
0.31 1.50
Slide 82

Weather in Brazil and the price of Coffee in New York
Elasticity explains why coffee prices are very volatile.
Due to the differences in supply elasticity in the long-run and short run.
Slide 83
Price of Brazilian Coffee
Slide 84

Coffee
Price
S
P1
S
A freeze or drought decreases the supply of coffee
P0
Short-Run 1) Supply is completely inelastic 2) Demand is relatively inelastic 3) Very large change in price
Q1
Q0
Quantity
Slide 85

Coffee
Price
P2 P0
Intermediate-Run 1) Supply and demand are more elastic 2) Price falls back to P2. 3) Quantity falls to Q2
D Q2 Q0
Quantity
Slide 86

Coffee
Price
Long-Run 1) Supply is extremely elastic. 2) Price falls back to P0. 3) Quantity increase to Q0.
P0
D
Q0
Quantity
Slide 87
Understanding and Predicting the Effects of Changing Market Conditions
First, we must learn how to fit linear demand and supply curves to market data. Then we can determine numerically how a change in a variable will cause supply or demand to shift and thereby affect the market price and quantity.
Slide 88
Available Data

Equilibrium Price, P*
Equilibrium Quantity, Q* Price elasticity of supply, ES, and demand, ED.
Slide 89

Price
a/b
Supply: Q = c + dP
P*
ED = -bP*/Q* ES = dP*/Q*
-c/d
Demand: Q = a - bP Q*
Quantity
Slide 90
Lets begin with the equations for supply and demand: Demand: QD = a - bP Supply: QS = c + dP
We must choose numbers for a, b, c, and d.

Slide 91
Step 1:
Recall:
E (P/Q)( Q/ P)
Slide 92
For linear demand curves, the change in quantity divided by the change in price is constant (equal to the slope of the curve).
Slide 93
Substituting the slopes for each into the formula for elasticity, we get:
ED - b(P * /Q*)
ES d(P * /Q*)
Since we will have values for ED, ES, P*, and Q*, we can solve for b & d, and a & c.
QD a bP
*
QS c dP
*
Slide 95
Deriving the long-run supply and demand for copper:
The relevant data are:
Q* = 7.5 mmt/yr.
P* = 75 cents/pound
ES = 1.6 ED = -0.8
Slide 96

Es = d(P*/Q*) 1.6 = d(75/7.5) = 0.1d d = 1.6/0.1 = 16
Ed = -b(P*/Q*) -0.8 = -b(.75/7.5) = -0.1b b = 0.8/0.1 = 8
Slide 97

Supply = QS* = c + dP* 7.5 = c + 16(0.75) 7.5 = c + 12 c = 7.5 - 12
Demand = QD* = a -bP* 7.5 = a -(8)(.75) 7.5 = a - 6 a = 7.5 + 6
c = -4.5
Q = -4.5 + 16P
a =13.5
Q = 13.5 - 8P
Slide 98
Setting supply equal to demand gives:
Supply = -4.5 + 16p = 13.5 - 8p = Demand

16p + 8p = 13.5 + 4.5
p = 18/24 = .75
Slide 99

Price
a/b
Supply: QS = -4.5 + 16P
.75
-c/d
Demand: QD = 13.5 - 8P 7.5

Mmt/yr
Slide 100
We have written supply and demand so that they only depend upon price. Demand could also depend upon income. Demand would then be written as:
Q a bP fI
Slide 101
We know the following information regarding the copper industry:

I = 1.0 P* = 0.75
Q* = 7.5
b=8
Income elasticity: E = 1.3
Slide 102
f can be found by substituting known values into the income elasticity formula:
E (I / Q)(Q / I )
and
f Q / I
Solving for f gives:
1.3 = (1.0/7.5)f
f = (1.3)(7.5)/1.0 = 9.75
Slide 104
Solving for a gives:
Q a bP fI
* *
7.5 = a - 8(0.75) + 9.75(1.0)
a = 3.75
Slide 105
Declining Demand and the Behavior of Copper Prices
The relevant factors leading to a decrease in the demand for copper are: 1) A decrease in the growth rate of power generation 2) The development of substitutes: fiber optics and aluminum
Slide 106
Real versus Nominal Prices of Copper 1965 - 1999
Slide 107
We will try to estimate the impact of a 20 percent decrease in the demand for copper. Recall the equation for the demand curve: Q = 13.5 - 8P
Slide 108
Multiply this equation by 0.80 to get the new equation. This gives: Q = (0.80)(13.5 - 8P) Q = 10.8 - 6.4P
Recall the equation for supply:
Q = -4.5 + 16P
The new equilibrium price is:
-4.5 + 16P = 10.8 - 6.4P

-16P + 6.4P = 10.8 + 4.5
P = 15.3/22.4
P = 68.3 cents/pound
Slide 110
The twenty percent decrease in demand resulted in a reduction in the equilibrium price to 68.3 cents from 75 cents, or 10 percent.
Slide 111
Price of Crude Oil
Slide 112
Upheaval in the World Oil Market
We can predict numerically the impact of a decrease in the supply of OPEC oil. In 1995:

P* = $18/barrel World demand and total supply = 23 bb/yr. OPEC supply = 10 bb/yr.
Non-OPEC supply = 13 bb/yr

Slide 113
Price Elasticity Estimates

Short-Run Long-Run
World Demand:
Competitive Supply (non-OPEC)
-0.05
0.10
-0.40
0.40
Slide 114
Short-Run Impact of a stoppage of Saudi Production equal to 3 bb/yr.
Short-run Demand
D = 24.08 - 0.06P
Short-run Competitive Supply
SC = 11.74 + 0.07P
Slide 115
Short-Run Impact of a stoppage of Saudi Production equal to 3 bb/yr.
Short-run Total Supply--before supply reduction (includes OPEC, 10bb/yr)
ST = 21.74 + 0.07P
Short-run Total Supply--after supply reduction
ST = 18.74 + 0.07P
Slide 116
New Price After Reduction
Demand = Supply
24.08 - 0.06P = 18.74 + 0.07P
P = 41.08
Slide 117
Impact of Saudi Production Cut

SC Price 45
($ per barrel) 40 35 30 25 20 18 15 10 5 0 5 10 15 20 23 25 30
Quantity 35 (billions barrels/yr) Slide 118
D ST ST
Short-Run Effect
Long-Run Impact of a stoppage Saudi Production equal to 3 bb/yr..
Long-run Demand
D
= 32.18 - 0.51P
Long-run Total Supply

S
= 17.78 + 0.29P
Slide 119
New Price is found setting long-run supply equal to long-run demand: 32.18 - 0.51P = 14.78 + 0.29P P = 21.75
Slide 120
Impact of Saudi Production Cut

Price 45
($ per barrel) 40 35 30 25 20 18 15 10 5 0 5 10 15 20 23 25 30 35
Quantity (billions barrels/yr) Slide 121
SC
D
ST ST
Long-run Effect
Due to the elasticity of the long-run supply and demand curves, the long-run effect of a cut in production is much less.
Effects of Government Intervention -Price Controls
If the government decides that the equilibrium price is too high, they may establish a maximum allowable ceiling price.
Slide 122
Effects of Price Controls

Price S
If price is regulated to be no higher than Pmax, quantity supplied falls to Q1 and quantity demanded increases to Q2. A shortage results
P0
Pmax
D
Excess demand
Q0
Quantity
Slide 123
Price Controls and Natural Gas Shortages
In 1954, the federal government began regulating the wellhead price of natural gas. In 1962, the ceiling prices that were imposed became binding and shortages resulted.
Slide 124
Price controls created an excess demand of 7 trillion cubic feet. Price regulation was a major component of U.S. energy policy in the 1960s and 1970s, and it continued to influence the natural gas markets in the 1980s.
Slide 125

The Data: Natural Gas
S PE 0.2
Cross elasticity of supply for oil 0.1

D PE
0.5
Cross elasticity of demand for oil 1.5 Supply: Q 14 2 PG .25 PO Demand : Q 5 PG 3.75 PO Supply Demand @ $2/TcF

The Data: Natural Gas
1975 regulatedprice $1.00 At $1.00/TcF QS 18 TcF and Q 25 TcF Shortage 7 TcF/yr
Slide 127
Summary
Supply-demand analysis is a basic tool of microeconomics. The market mechanism is the tendency for supply and demand to equilibrate, so that there is neither excess demand nor excess supply
Slide 128
Summary
Elasticities describe the responsiveness of supply and demand to changes in price, income, and other variables. Elasticities pertain to a time frame. If we can estimate the supply and demand curves for a particular market, we can calculate the market clearing price.
Slide 129
Summary
Simple numerical analysis can often be done by fitting linear supply and demand curves to data on price and quantity and to estimates of elasticities.
Slide 130
End of Chapter 2
The Basics of Supply and Demand

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Chapter 2

The Basics of Supply and Demand

Supply and Demand

The Market Mechanism

Elasticities of Supply and Demand

Chapter 2: The Basics of Supply and Demand

Chapter 2: The Basics of Supply and Demand

Applications of Supply and Demand Analysis

Chapter 2: The Basics of Supply and Demand

Applications of Supply and Demand Analysis

Chapter 2: The Basics of Supply and Demand

Supply and Demand

The Supply Curve

Chapter 2: The Basics of Supply and Demand

Supply and Demand

The Supply Curve

This price-quantity relationship can be shown by the equation:

Chapter 2: The Basics of Supply and Demand

Supply and Demand

The Supply Curve Graphically

Supply and Demand

The Supply Curve Graphically

Chapter 2: The Basics of Supply and Demand

Supply and Demand

Non-price Determining Variables of Supply

Chapter 2: The Basics of Supply and Demand

Supply and Demand

The cost of raw materials falls

At P1, produce Q2 At P2, produce Q1 P1

Supply curve shifts right to S

Supply and Demand

Chapter 2: The Basics of Supply and Demand

Supply and Demand

Chapter 2: The Basics of Supply and Demand

Supply and Demand

The Demand Curve

Supply and Demand

Supply and Demand

Supply and Demand

Non-price Determining Variables of Demand

Income Consumer Tastes

Price of Related Goods

Chapter 2: The Basics of Supply and Demand

Supply and Demand

At P1, produce Q2 At P2, produce Q1

Demand Curve shifts right P1 More purchased at any price on D than on D

Shifts in Supply and Demand

Chapter 2: The Basics of Supply and Demand

The Market Mechanism

The Market Mechanism

Characteristics of the equilibrium or market clearing price:

Chapter 2: The Basics of Supply and Demand

The Market Mechanism

The Market Mechanism

The market price is above equilibrium

Chapter 2: The Basics of Supply and Demand

The Market Mechanism

Chapter 2: The Basics of Supply and Demand

The Market Mechanism

The market price is above equilibrium:

There is excess supply

Chapter 2: The Basics of Supply and Demand

The Market Mechanism

Chapter 2: The Basics of Supply and Demand