6.1 Price, Quantity, and Market Equilibrium Objectives. Understand how markets reach equilibrium. Explain how markets reduce transaction costs.

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1 6.1 Price, Quantity, and Market Equilibrium Objectives Understand how markets reach equilibrium. Explain how markets reduce transaction costs.

2 6.1 Price, Quantity, and Market Equilibrium Key Terms market equilibrium surplus shortage transaction cost

3 6.1 Price, Quantity, and Market Equilibrium SLIDE 3 Market Equilibrium When the quantity that consumers are willing and able to buy equals the quantity that producers are willing and able to sell, that market reaches market equilibrium.

4 6.1 Price, Quantity, and Market Equilibrium SLIDE 4 Equilibrium in the Pizza Market Figure 6.1

5 6.1 Price, Quantity, and Market Equilibrium SLIDE 5 Surplus Forces the Price Down At a given price, the amount by which quantity supplied exceeds quantity demanded is called the surplus. As long as quantity supplied exceeds quantity demanded, the surplus forces the price lower.

6 6.1 Price, Quantity, and Market Equilibrium SLIDE 6 Shortage Forces the Price Up At a given price, the amount by which quantity demanded exceeds quantity supplied is called the shortage. As long as quantity demanded and quantity supplied differ, this difference forces a price change.

7 6.1 Price, Quantity, and Market Equilibrium SLIDE 7 Market Forces Lead to Equilibrium Price and Quantity The equilibrium price, or market-clearing price, equates quantity demanded with quantity supplied. Because there is no shortage and no surplus, there is no longer any pressure for the price to change.

8 6.1 Price, Quantity, and Market Equilibrium SLIDE 8 Market Exchange Markets answer the questions What to produce How to produce it For whom to produce it

9 6.1 Price, Quantity, and Market Equilibrium SLIDE 9 Adam Smith s Invisible Hand Although each individual pursues his or her own self-interest, the invisible hand of market competition promotes the general welfare.

10 6.1 Price, Quantity, and Market Equilibrium SLIDE 10 Market Exchange Is Voluntary Neither buyers nor sellers would participate in the market unless they expected to be better off. Prices help people recognize market opportunities to make better choices as consumers and as producers.

11 6.1 Price, Quantity, and Market Equilibrium SLIDE 11 Markets Reduce Transaction Costs Transaction costs are the cost of time and information needed to carry out market exchange. The higher the transaction cost, the less likely the exchange will take place.

12 6.2 Shifts of Demand and Supply Curves Objectives Explain how a shift of the demand curve affects equilibrium price and quantity. Explain how a shift of the supply curve affects equilibrium price and quantity. Explain what happens to equilibrium price and quantity if both curves shift.

13 6.2 Shifts of Demand and Supply Curves Key Terms increase in demand decrease in demand increase in supply decrease in supply

14 3 Shifts of the Demand Curve A shift of the demand curve means that quantity demanded changes at each price.

15 4 What Could Shift the Demand Curve? An increase in the money income of consumers An increase in the price of a substitute A change in expectations A growth in the population of consumers A change in consumer tastes

16 5 An Increase in Demand An increase in demand means that consumers are now more willing and able to buy the product at every price.

17 6 Effects of an Increase in Demand Figure 6.2

18 7 A Decrease in Demand A decrease in demand means that consumers are less willing and able to buy the product at every price.

19 8 Effects of an Decrease in Demand Figure 6.3

20 9 Summary of Demand Shifts If the demand curve shifts rightward, price and quantity increase. If the demand curve shifts leftward, price and quantity decrease.

21 10 Shifts of the Supply Curve A shift of the supply curve means that quantity supplied changes at each price.

22 11 What Could Shift the Supply Curve? A reduction in the price of a resource A decline in the price of another good these resources could make A technological breakthrough A change in expectations An increase in the number of producers

23 12 An Increase in Supply An increase in supply means that producers are more willing and able to supply pizza at every price.

24 13 Effects of an Increase in Supply Figure 6.4

25 14 A Decrease in Supply A decrease in supply means that producers are less willing and able to supply the product at every price.

26 15 Effects of a Decrease in Supply Figure 6.5

27 16 Summary of Supply Shifts If the supply curve shifts rightward, price decreases but quantity increases. If supply shifts leftward, price increases but quantity decreases.

28 17 Both Curves Shift Curves shift in the same direction Equilibrium quantity will increase. What happens to price depends on which curve shifts more. Curves shift in opposite directions Equilibrium price will increase if demand increases and supply decreases. Equilibrium price will decrease if demand decreases and supply increases.

29 Change in Demand Increases Decreases 18 Change in Supply Equilibrium price change is indeterminate. Equilibrium quantity increases. Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. Figure 6.6