SECTION 1 Seeking Equilirium: Demnd nd Supply OBJECTIVES KEY TERMS TAKING NOTES In Setion 1, you will explore mrket equilirium nd see how it is rehed explin how demnd nd supply intert to determine equilirium prie nlyze wht uses surplus, shortge, nd disequilirium identify how hnges to demnd nd supply ffet the equilirium prie mrket equilirium, p. 164 equilirium prie, p. 164 surplus, p. 167 shortge, p. 167 disequilirium, p. 169 As you red Setion 1, omplete luster digrm like the one shown using the key onepts nd other helpful words nd phrses. Use the Grphi Orgnizer t Intertive Review @ ClssZone.om disequilirium Equilirium mrket equilirium The Intertion of Demnd nd Supply KEY CONCEPTS QUICK REFERENCE Mrket equilirium ours when the quntity demnded nd the quntity supplied t prtiulr prie re equl. Equilirium prie is the prie t whih the quntity demnded nd the quntity supplied re equl. In Chpters 4 nd 5, you lerned out how demnd nd supply work in the mrket. Rell tht mrket is ny ple or sitution in whih people uy nd sell goods nd servies. Sine the mrket is the ple where uyers nd sellers ome together, it is lso the ple where demnd nd supply intert. As uyers nd sellers intert, the mrket moves towrd mrket equilirium, sitution in whih the quntity demnded of good or servie t prtiulr prie is equl to the quntity supplied t tht prie. Equilirium prie is the prie t whih the quntity of produt demnded y onsumers nd the quntity supplied y produers re equl. EXAMPLE Mrket Demnd nd Supply Shedule Let s look t n exmple of how this onept works in prtiulr mrket. Kren runs sndwih shop ner n offie prk. Reently, she deided to offer new produt t lunhtime prepred slds. On the first dy, she mkes up 4 slds nd offers them t $1 eh. She is disppointed when she sells only 1 nd hs to throw the rest wy. The next dy she is more utious. She lowers 164 Chpter 6
the prie to $4 eh nd mkes only 15 slds. She disovers tht 35 ustomers wnted her slds t the lower prie. How n Kren find the right prie? Over the ourse of week, Kren experiments with different omintions of prie nd quntity of slds supplied until she disovers mrket equilirium t $6 per sld. At tht prie, she is willing to offer 25 slds for sle, nd she sells ll of them. When she hs either too mny or too few slds, she is motivted to hnge her prie. Mrket equilirium is the point t whih quntity demnded nd quntity supplied re in lne. FIGURE 6.1 KAREN S MARKET DEMAND AND SUPPLY SCHEDULE Prie per Sld ($) Quntity Demnded Quntity Supplied 1 1 4 8 15 35 6 25 25 4 35 15 2 4 1 At pries ove $6, quntity supplied exeeds quntity demnded. At the prie of $6, the quntity demnded nd the quntity supplied re equl. At pries elow $6, the quntity demnded exeeds the quntity supplied. Only t the equilirium prie of $6 re the quntity demnded nd the quntity supplied equl. ANALYZE TABLES 1. Wht is the differene etween quntity supplied nd quntity demnded when the prie is $1? Wht is the differene when the prie is $2? 2. How does this mrket demnd nd supply shedule illustrte the lws of demnd nd supply? Use n intertive mrket demnd nd supply shedule nd urve t ClssZone.om Look t Figure 6.1 to see the informtion tht Kren gthered from her first week selling prepred slds. This tle is omined mrket demnd nd supply shedule tht shows the quntities of slds supplied nd demnded t vrious pries. Notie tht quntity demnded nd quntity supplied re different t every line of the shedule exept one. Tht line represents mrket equilirium nd shows the equilirium prie of $6. When Kren offers slds t pries ove $6, she produes more slds thn she n sell nd hs to throw some wy. When she offers slds t pries elow $6, there is unmet demnd euse people wnt more slds thn Kren is willing to offer t those pries. Kren s experiene shows how the lws of demnd nd supply intert in the mrket. She wnts to offer more slds t higher pries thn t lower pries euse she wnts to ern more profit. Her osts would mke it impossile to ern muh, if ny, profit if she were to sell the numer of slds tht the offie workers would like to uy t the lower pries. In similr wy, while the offie workers my like the ide of fresh slds for lunh, they re not willing to uy the quntity of slds tht Kren wnts to sell t higher pries. Find n updte on mrket equilirium t ClssZone.om Demnd, Supply, nd Pries 165
EXAMPLE Mrket Demnd nd Supply Curve Just s it is possile to onvert mrket demnd shedule to mrket demnd urve or mrket supply shedule to mrket supply urve, it is possile to grph omined mrket demnd nd supply shedule. Figure 6.2 portrys Kren s mrket demnd nd supply shedule on omined grph. On the grph, the vertil xis shows the vrious pries t whih slds re offered for sle nd ought. The horizontl xis shows the quntity of slds, whether it is the quntity demnded or the quntity supplied. The demnd urve (D) is plotted using the pries nd the quntities demnded (Figure 6.1, olumns 1 nd 2). The supply urve (S) is plotted using the pries nd the quntities supplied from the omined shedule (Figure 6.1, olumns 1 nd 3). You n red eh individul urve the sme wy tht you did in Chpters 4 nd 5, when demnd nd supply were shown on seprte grphs. Eh point on the demnd urve shows the intersetion of prie nd quntity demnded. Eh point on the supply urve shows the intersetion of prie nd quntity supplied. FIGURE 6.2 MARKET DEMAND AND SUPPLY CURVES Prie per sld (in dollrs) 1 8 6 4 2 1 2 3 4 5 Quntity of slds S Prie per Sld ($) D Quntity Demnded Quntity Supplied 1 1 4 8 15 35 6 25 25 4 35 15 2 4 1 The demnd urve (D) shows quntity demnded t vrious pries nd slopes down. The supply urve (S) shows quntity supplied t vrious pries nd slopes up. This is the point of mrket equilirium, where quntity supplied nd demnded re equl. ANALYZE GRAPHS 1. Wht is the quntity supplied t $8? Wht is the quntity demnded t $8? 2. How do these mrket demnd nd supply urves illustrte the onept of equilirium prie? Look t Figure 6.2 gin nd notie tht the two urves interset t only one point; this is the point of mrket equilirium. It ours when quntity demnded nd quntity supplied re the sme 25 slds t $6. Showing the two urves together llows you to see the intertion of demnd nd supply grphilly. APPLICATION Applying Eonomi Conepts A.Crete omined mrket demnd nd supply shedule for pizz t pries of $25, $2, $15, $1, nd $5, where $1 is the prie t whih there is equilirium. 166 Chpter 6
Rehing the Equilirium Prie KEY CONCEPTS It s ler from the exmple of Kren s slds tht mrkets don t rrive t equilirium prie instntly; they often require proess of tril nd error. The mrket my experiene surplus, whih is the result of quntity supplied eing greter thn quntity demnded, usully euse pries re too high. Or shortge my our, the result of quntity demnded eing greter thn quntity supplied, usully euse pries re too low. EXAMPLE Surplus, Shortge, nd Equilirium In Figure 6.3, we n see how Kren s experiene demonstrtes the onepts of surplus nd shortge. It lso shows tht equilirium ours when there is neither surplus nor shortge, euse quntity demnded nd quntity supplied re equl. QUICK REFERENCE Surplus is the result of quntity supplied eing greter thn quntity demnded. Shortge is the result of quntity demnded eing greter thn quntity supplied. FIGURE 6.3 Prie per sld (in dollrs) 1 8 6 4 2 SURPLUS, SHORTAGE, AND EQUILIBRIUM D 1 2 3 4 5 Quntity of slds S When the prie is ove $6, quntity supplied exeeds quntity demnded, nd there is surplus (shded in ornge). When the prie is elow $6, quntity demnded exeeds quntity supplied, nd there is shortge (shded in lue). At the equilirium prie, there is neither surplus nor shortge. ANALYZE GRAPHS 1. Is there surplus or shortge when the prie is $1? How ig is tht surplus or shortge? How gret is the surplus or shortge when the prie is $2? 2. Wht does this grph illustrte out surplus, shortge, nd equilirium prie? In Figure 6.3, there is surplus in the re shded ornge. As Kren disovered when she tried to sell slds t pries ove $6, she hd too mny nd hd to throw some wy. The mount of surplus is mesured y the horizontl distne etween the two urves t eh prie. For exmple, t the prie of $8, the distne shown y the lk line etween 15 nd 35 shows surplus of 2 slds. When there is surplus, pries tend to fll until the surplus is sold nd equilirium is rehed. Produers might lso hoose to ut k their prodution to quntity tht is more in line with wht onsumers demnd t the higher pries. Demnd, Supply, nd Pries 167
The lue re in Figure 6.3 represents where there is shortge. When Kren deided to hrge less thn $6, she hd too few slds nd lots of unhppy ustomers who weren t le to get the slds they wnted. As with the surplus, the mount of shortge is mesured y the horizontl distne etween the two urves t eh prie. For exmple, t the prie of $4, the distne shown y the lk line etween 15 nd 35 slds shows shortge of 2 slds. When there is shortge, produers rise pries in n ttempt to lne quntity supplied nd quntity demnded. Produers my lso try to inrese quntity supplied to meet the quntities demnded t the lower pries. EXAMPLE Holidy Toys Holidy Shortges Consumer tstes often use spikes in demnd for ertin items during the holidys. The onepts of surplus nd shortge nd the move to equilirium re tive in mny mrkets t different times. Perhps they re most visile in the mrket for toys during the holidy shopping seson. Toys re often fds, nd hildren s tstes hnge rpidly. It is diffiult for mrketers to know how muh to supply nd t wht prie to est meet the quntities demnded y onsumers. Sometimes they overestimte toy s populrity nd end up with surplus. If they underestimte populrity, they re fed with shortge. In 1996, for exmple, Tyo Toys In. introdued Tikle Me Elmo. The toy inluded mirohip tht mde the toy lugh when it ws touhed. Tyo expeted the toy to e populr nd ordered out 5, for the holidy seson. It ws pried round $3. Sles strted slowly, nd stores thought they might hve surplus. But fter severl populr television personlities promoted it, Tikle Me Elmo eme the hottest toy of tht holidy seson, nd shortge developed. Even when pries inresed mrkedly, uyers were undeterred. They ontinued to purhse the toys until they were ll gone. Tyo tried to inrese its supply, ut the ftories tht mde Tikle Me Elmo were loted in Asi, nd the shortge persisted throughout the holidy seson. By spring, the quntity supplied hd douled. By then, however, the height of the fd ws over. Initilly, stores tried to sell the toys t the sme high pries hrged during the holidy seson. But onsumers were relutnt to uy, nd surplus resulted. Eventully, the mrket rehed equilirium t prie of out $25. When you see suppliers reduing pries, it is often euse they hve surplus of produts to sell. Consider, for exmple, wht hppens to the pries of lothing items tht re out of seson or no longer in fshion. On the other hnd, if n item eomes prtiulrly populr or is in short supply for some other reson, suppliers will rise pries. The mrket does not lwys reh equilirium quikly, ut it is lwys moving towrd equilirium. Crete demnd nd supply urve t ClssZone.om APPLICATION Applying Eonomi Conepts B. Look k t the mrket demnd nd supply shedule you reted for Applition A on p. 166. Use it to rete grph showing the intertion of demnd nd supply nd mrk it to show surplus, shortge, nd equilirium. 168 Chpter 6
Equilirium Prie in Rel Life KEY CONCEPTS In theory, the reltionship etween demnd nd supply in the mrket seems strightforwrd. The rel world, however, is more omplex. In erlier hpters, you lerned tht there re severl ftors tht n use demnd nd supply to hnge. When there is n imlne etween quntity demnded nd quntity supplied, stte of disequilirium exists, nd the proess of finding equilirium strts over gin. EXAMPLE Chnge in Demnd nd Equilirium Prie Let s tke look t how the mrket moves from disequilirium y onsidering the effet of hnges in demnd on the equilirium prie for thleti shoes. Rell tht hnge in demnd ours when one of six ftors inome, onsumer tste, onsumer expettions, mrket size, sustitutes, nd omplements prompts onsumers to hnge the quntity demnded t every prie. In Figures 6.4 nd 6.5, the intersetion of the demnd urve (D1) nd the supply urves (S) shows n equilirium prie of $75, with quntity demnded nd supplied of 3, pirs of shoes. When hnge in onsumer tste uses derese in demnd for thleti shoes t every prie, the demnd urve shifts to the left, s shown in Figure 6.4. Notie tht this new demnd urve (D2) intersets the supply urve t lower prie, round $65. This eomes the new equilirium prie. At this QUICK REFERENCE Disequilirium ours when quntity demnded nd quntity supplied re not in lne. FIGURES 6.4 AND 6.5 CHANGES IN DEMAND AND EQUILIBRIUM PRICE Prie per pir (in dollrs) FIGURE 6.4 DECREASE IN DEMAND FIGURE 6.5 INCREASE IN DEMAND 125 1 75 5 25 D2 1 2 3 4 5 6 7 Quntity of shoes (in thousnds) S D1 Prie per pir (in dollrs) 125 1 ANALYZE GRAPHS 1. Wht hppens to quntity demnded t $1 when demnd dereses? Wht hppens to quntity demnded t $1 when demnd inreses? 2. Does hnge in demnd hve diret or inverse reltionship to equilirium prie? Explin your nswer. 75 5 25 d 1 2 3 4 5 6 7 Quntity of shoes (in thousnds) S D1 D3 Use n intertive mrket demnd nd supply urve to see hnges in demnd, supply, nd equilirium prie t ClssZone.om In Figure 6.4, demnd dereses; the demnd urve shifts left nd intersets the supply urve t lower point. In Figure 6.5, demnd inreses; the demnd urve shifts right nd intersets the supply urve t higher point. When demnd dereses (Fig. 6.4), the equilirium prie flls to out $65. d When demnd inreses (Fig. 6.5), the equilirium prie rises to out $9. Demnd, Supply, nd Pries 169
new, lower equilirium prie, the quntity demnded dereses to 2,5 pirs of shoes. In other words, when onsumers demnd fewer goods nd servies t every prie, the equilirium prie will fll nd suppliers will sell fewer units even though the prie is lower. Suppose tht n inrese in the numer of young dults uses demnd for thleti shoes to inrese. When there is n inrese in demnd, the demnd urve shifts to the right, s shown in Figure 6.5. Notie tht the new demnd urve (D3) intersets the supply urve t higher prie, round $9. As the equilirium prie inreses to this higher level, the quntity demnded lso inreses to 3,5 pirs of shoes. When onsumers demnd more goods nd servies t every prie, equilirium prie will rise nd suppliers will sell more, even t higher pries. EXAMPLE Chnge in Supply nd Equilirium Prie Now let s onsider how hnges in supply might ffet equilirium prie. Rell tht hnge in supply ours when something in the mrket prompts produers to offer different mounts for sle t every prie. Rememer from Chpter 5 tht the six ftors tht n hnge supply re input osts, produtivity, tehnology, government tion, produer expettions, nd numer of produers. In Figures 6.6 nd 6.7, the intersetion of the supply urve (S1) nd the demnd urve (D) shows n equilirium prie of $75, with quntity supplied nd demnded of 3, pirs of shoes. If the prie of the rw mterils needed to produe thleti shoes inreses, the result is derese in supply of these shoes t every prie. FIGURES 6.6 AND 6.7 CHANGES IN SUPPLY AND EQUILIBRIUM PRICE Prie per pir (in dollrs) FIGURE 6.6 DECREASE IN SUPPLY FIGURE 6.7 INCREASE IN SUPPLY 125 1 75 5 25 1 2 3 4 5 6 7 Quntity of shoes (in thousnds) S2 S1 125 S1 S3 D Prie per pir (in dollrs) 1 75 5 25 1 2 3 4 5 6 7 Quntity of shoes (in thousnds) ANALYZE GRAPHS 1. Wht hppens to quntity supplied t $1 when supply dereses? Wht hppens to quntity supplied t $1 when supply inreses? 2. How do these grphs illustrte the reltionship etween hnge in supply nd hnge in equilirium prie? d D In Figure 6.6, supply dereses; the supply urve shifts left nd intersets the demnd urve t higher point. In Figure 6.7, supply inreses; the supply urve shifts right nd intersets the demnd urve t lower point. When supply dereses (Fig. 6.6) the equilirium prie rises to out $9. d When supply inreses (Fig. 6.7) the equilirium prie flls to out $55. 17 Chpter 6
In this sitution, the supply urve shifts to the left, s shown in Figure 6.6. Notie tht the new supply urve (S2) intersets the demnd urve t higher prie, round $9. This is the new equilirium prie. Beuse of this inrese in prie, the quntity demnded t equilirium dereses to 2,5 pirs of shoes. In other words, when there re fewer goods nd servies ville t every prie, equilirium prie will rise. When new tehnology llows the mnufturer to produe shoes more effiiently, supply inreses, nd the supply urve shifts to the right, s shown in Figure 6.7. Notie tht the new supply urve (S3) intersets the demnd urve t lower prie, out Tehnology Both supply nd equilirium prie re ffeted when tehnology improves the mnufturing proess. $55. This is the new equilirium prie. Beuse of this derese in prie, the quntity demnded t equilirium inreses to out 4,1 pirs of shoes. In other words, when there re more goods nd servies ville t every prie, equilirium prie will fll. Look t Figures 6.4, 6.5, 6.6, nd 6.7 one more nd notie whih situtions use equilirium prie to fll nd whih use equilirium prie to rise. The reltionships etween hnges in demnd or supply nd hnges in equilirium prie re illustrted in Figure 6.8. Equilirium prie flls when there is derese in demnd or n inrese in supply. Equilirium prie rises when there is n inrese in demnd or derese in supply. In other words, when onsumers wnt less or produers supply more, pries will fll. When onsumers wnt more or produers supply less, pries will rise. FIGURE 6.8 EQUILIBRIUM PRICE AND CHANGES IN DEMAND AND SUPPLY If demnd dereses supply inreses equilirium prie flls. If demnd inreses supply dereses OR THEN OR THEN equilirium prie rises. APPLICATION Anlyzing Effets C. If one of the three pizz prlors in your neighorhood loses, wht will hppen to the supply of pizz? How will tht ffet the equilirium prie of pizz? Demnd, Supply, nd Pries 171
ECONOMICS SKILLBUILDER For more on interpreting grphs, see the Skilluilder Hndook, pge R29. Interpreting Grphs: Shifting Curves Grphs show sttistil informtion in visul mnner. A grph tht shows shifting urve should immeditely lert the reder to one of the following: hnge in quntity demnded t every prie, or hnge in quntity supplied t every prie. In Figure 6.9, hnge in the numer of produers hs used n inrese in supply t every prie. The sndwih shop ross the street from Forest View High Shool now hs ompetitor. TECHNIQUES FOR ANALYZING SHIFTING CURVES Use the following strtegies, long with wht you lerned throughout Setion 1, to nlyze the grph. Use the title to identify the min ide of the grph. If supply hs shifted, then we know tht quntity supplied t every prie hs either inresed or deresed. Red the xis lels refully. When oth quntity supplied nd demnded re present, look for n intersetion to find equilirium prie. FIGURE 6.9 Prie (in dollrs) 6 5 4 3 2 1 SHIFT IN SUPPLY OF SANDWICHES 2 4 6 8 1 12 S1 Quntity of sndwihes demnded nd supplied D S2 Use the nnottions to find key elements of the grph. Annottion shows the equilirium prie where urve S1 meets urve D. This is the initil equilirium prie. Curve shifts to the right. This is the new equilirium prie. Notie tht shows shift to the right. An inrese in supply lwys shows rightwrd shift; derese in supply lwys uses leftwrd shift. Notie the new equilirium prie,. An inrese in supply results in lower equilirium prie. THINKING ECONOMICALLY Anlyzing 1. Wht re the pre-shift nd post-shift equilirium pries for sndwih? Will n inrese in quntity supplied t every prie lwys result in lower equilirium prie? Why? 2. Imgine tht insted of n inrese in supply, there is derese in demnd. How will the equilirium prie hnge? Why? 3. On seprte sheet of pper, sketh interseting quntity supplied nd demnded urves with n equilirium prie of $4 t 8 sndwihes. How hve the urves shifted from those tht pper in Figure 6.9? 172 Chpter 6
SECTION 1 Assessment ClssZone.om REVIEWING KEY CONCEPTS ECONOMICS IN PRACTICE 1. Explin the differenes etween the terms in eh of these pirs:. mrket equilirium disequilirium. surplus shortge 2. How re surplus nd shortge relted to equilirium prie? 3. Why is equilirium prie represented y the intersetion of the supply nd demnd urves in prtiulr mrket? 4. Why do hnges in demnd or supply use disequilirium? 5. Why is the mrket lwys moving towrd equilirium? 6. Using Your Notes How is equilirium prie relted to mrket equilirium? Refer to your ompleted luster digrm. Use the Grphi Orgnizer t Intertive Review @ ClssZone.om CRITICAL THINKING disequilirium Equilirium 7. Anlyzing Dt Look t Figures 6.4, 6.5, 6.6, nd 6.7 gin. Wht hppens to surplus nd shortge s equilirium prie hnges in eh grph? Wht generl onlusions n you drw from this informtion? mrket equilirium 8. Anlyzing Cuses Suppose tht the federl government deides to inrese the exise tx on ellulr phone servies y.1 perent. Why will this tion use the equilirium prie of ellulr phone servies to rise? 9. Applying Eonomi Conepts Between 23 nd 25, there ws huge growth in the mrket for premium lue jens pried t $2 or more per pir. The growth ws lrgely fueled y populr mgzines showing elerities wering ertin rnds. Then, in the summer of 25, mjor deprtment stores strted utting pries on the jens; they were lso found on We sites tht offer jens t disount pries. Use the eonomi onepts tht you lerned in this setion to desrie wht is hppening in this mrket. 1. Chllenge Study Figures 6.4, 6.5, 6.6, nd 6.7 gin. Wht would hppen if hnge in onsumer tste used n inrese in demnd for thleti shoes nd more suppliers entered the mrket t the sme time? Assume tht the inreses in demnd nd in supply re proportiontely the sme. How would this result e different if eh of these hnges hppened seprtely? Finding Equilirium Prie Suppose tht you re mnufturer of new mini refrigertor for ollege dorm rooms. You expet your produt to e populr euse of its ompt size nd high teh design. After few weeks in the mrket you re le to develop the following mrket demnd nd supply shedule. Prie per Refrigertor ($) Quntity Demnded Quntity Supplied 225 5 6, 2 1, 4,5 175 1,5 3,5 15 2,5 2,5 125 4, 1,5 Crete Demnd nd Supply Curve Use this mrket demnd nd supply shedule to rete mrket demnd nd supply urve nd determine the equilirium prie. Chllenge Clulte surplus or shortge t every prie nd suggest wys the mnufturer ould try to eliminte the surplus nd rise the equilirium prie. Demnd, Supply, nd Pries 173