Lecture Notes: Market Forces of Supply and Demand

Overview

• Continuing discussion on Chapter 4: Market Forces of Supply and Demand.
• Focus on the interaction between supply and demand, and changes in equilibrium.

Key Concepts

Equilibrium

• Definition: The market price has reached a level where quantity supplied equals quantity demanded.
• Graphically: Intersection of supply curve and demand curve.
• Equilibrium Point:
  • Equilibrium Price (PE)
  • Equilibrium Quantity (QE)

Supply and Demand Curves

• Supply Curve: Upward sloping, indicates quantity suppliers are willing to sell.
• Demand Curve: Downward sloping, indicates quantity buyers are willing to purchase.

Market Imbalances

1. Surplus

   • Occurs when quantity supplied > quantity demanded.
   • Results in excess supply, downward pressure on prices.
   • Market response: Lower prices to increase quantity demanded and decrease quantity supplied.
   • Example: If equilibrium price is $62.5 and sellers set price at $75, quantity supplied = 20 units, quantity demanded = 10 units → Excess supply of 10 units.

2. Shortage

   • Occurs when quantity demanded > quantity supplied.
   • Results in excess demand, upward pressure on prices.
   • Market response: Increase prices to decrease quantity demanded and increase quantity supplied.
   • Example: If equilibrium price is $62.5 and sellers set price at $50, quantity supplied = 10 units, quantity demanded = 20 units → Excess demand of 10 units.

Analyzing Changes in Equilibrium

Steps for Analysis

1. Identify Curve Affected: Determine if the event shifts the supply curve, demand curve, or both.
2. Direction of Change: Decide if there will be a shift to the left or right, or movement along the curve.
3. Use Supply and Demand Diagram: Draw initial and new equilibrium to compare effects on price and quantity.

Examples of Change in Market Equilibrium

1. Hot Weather Effect on Ice Cream Demand

   • Hot weather increases demand for ice cream → Demand curve shifts to the right.
   • Result: Higher equilibrium price and quantity.

2. Hurricane Effect on Sugar Prices

   • Increased sugar prices due to hurricane damage → Affects supply curve (input price).
   • Result: Supply curve shifts to the left, leading to higher equilibrium price and lower equilibrium quantity.

Summary

• Equilibrium is achieved when supply equals demand; imbalances (surplus/shortage) lead to market adjustments.
• Analyzing market changes involves identifying affected curves, direction of shifts, and drawing diagrams for clarity.

Next Steps

• Students to complete the exercise posted on the model.