MARKET ADJUSTMENTS

Changes To Demand And Supply

MARKET ADJUSTMENTS

The price of a product remains at the equilibrium point until something changes the demand and/or supply in a market.

Changes in market demand or market supply are not unusual, in fact, most markets have demands and supplies that drift around a bit.

MARKET ADJUSTMENTS

Mostly, these change are ignored. However, large changes in demand or supply cannot be ignore.

It’s possible therefore, to examine the impact on equilibrium price and quantity of an increase or decrease in demand, and an increase or decrease in supply.

AN INCREASE IN DEMAND AS A TABLE

PriceQuantityDemanded 1

QuantityDemanded 2

QuantitySupplied

$1.00 500 a day 700 a day 100 a day

$2.00 400 a day 600 a day 200 a day

$3.00 300 a day 500 a day 300 a day

$4.00 200 a day 400 a day 400 a day

$5.00 100 a day 300 a day 500 a day

AN INCREASE IN DEMAND AS A GRAPH

0 100 200 300 400 500 600 700 Quantity

$1.00

$2.00

$3.00

$4.00

$5.00

Pric

e

Market EquilibriumIncrease in Demand

D* D**

AN INCREASE IN DEMAND IN EQUATION FORMQd = 800 - 100(Price) and Qs = 100(Price)

Set: Qd = Qs

Substitute: 800 - 100(Price) = 100(Price)

Simplify: 800 = 200(Price)

Solve: $4 = Price

Qd = 800 - 100(Price) Qs = 100(Price)

Qd = 800 - 100(4) Qs = 100(4)

Qd = 400 Qs = 400

MARKET ADJUSTMENT TO AN INCREASE IN DEMAND When demand increases a larger quantity is

demanded at every price.

The result is an increase in price to $4.00 and an increase in quantity to 400.

A DECREASE IN DEMAND AS A TABLE

PriceQuantityDemanded 1

QuantityDemanded 2

QuantitySupplied

$1.00 500 a day 300 a day 100 a day

$2.00 400 a day 200 a day 200 a day

$3.00 300 a day 100 a day 300 a day

$4.00 200 a day 0 a day 400 a day

$5.00 100 a day 0 a day 500 a day

A DECREASE IN DEMAND AS A GRAPH

0 100 200 300 400 500 Quantity

$1.00

$2.00

$3.00

$4.00

$5.00

Pric

eMarket Equilibrium

Decrease in Demand

D*

D**

A DECREASE IN DEMAND IN EQUATION FORMQd = 400 - 100(Price) and Qs = 100(Price)

Set: Qd = Qs

Substitute: 400 - 100(Price) = 100(Price)

Simplify: 400 = 200(Price)

Solve: $2 = Price

Qd = 400 - 100(Price) Qs = 100(Price)

Qd = 400 - 100(2) Qs = 100(2)

Qd = 200 Qs = 200

MARKET ADJUSTMENT TO A DECREASE IN DEMAND When demand decreases a smaller quantity

is demanded at every price.

The result is an decrease in price to $2.00 and an decrease in quantity to 200.

AN INCREASE IN SUPPLY AS A TABLE

PriceQuantityDemanded

QuantitySupplied 1

QuantitySupplied 2

$1.00 500 a day 100 a day 300 a day

$2.00 400 a day 200 a day 400 a day

$3.00 300 a day 300 a day 500 a day

$4.00 200 a day 400 a day 600 a day

$5.00 100 a day 500 a day 700 a day

AN INCREASE IN SUPPLY AS A GRAPH

0 100 200 300 400 500 600 700 Quantity

$1.00

$2.00

$3.00

$4.00

$5.00

Pric

eMarket Equilibrium

Increase in Supply

S*S**

AN INCREASE IN SUPPLY IN EQUATION FORMQd = 600 - 100(Price) and

Qs = 100(Price) +200

Set: Qd = Qs

Substitute: 600-100(Price) = 100(Price)+200

Simplify: 400 = 200(Price)

Solve: $2 = Price

Qd = 600 - 100(Price) Qs = 100(Price)+200

Qd = 600 - 100(2) Qs = 100(2) + 200

Qd = 400 Qs = 400

MARKET ADJUSTMENT TO AN INCREASE IN SUPPLY When supply increases a larger quantity is

supplied at every price.

The result is a decrease in price to $2.00 and an increase in quantity to 400.

A DECREASE IN SUPPLY AS A TABLE

PriceQuantityDemanded

QuantitySupplied 1

QuantitySupplied 2

$1.00 500 a day 100 a day 0 a day

$2.00 400 a day 200 a day 0 a day

$3.00 300 a day 300 a day 100 a day

$4.00 200 a day 400 a day 200 a day

$5.00 100 a day 500 a day 300 a day

A DECREASE IN SUPPLY AS A GRAPH

0 100 200 300 400 500 Quantity

$1.00

$2.00

$3.00

$4.00

$5.00

Pric

eMarket Equilibrium

Decrease in Supply

S*S**

A DECREASE IN SUPPLY IN EQUATION FORMQd = 600 - 100(Price) and

Qs = 100(Price) - 200

Set: Qd = Qs

Substitute: 600-100(Price) = 100(Price)-200

Simplify: 800 = 200(Price)

Solve: $4 = Price

Qd = 600 - 100(Price) Qs = 100(Price)-200

Qd = 600 - 100(4) Qs = 100(4) - 200

Qd = 200 Qs = 200

MARKET ADJUSTMENT TO A DECREASE IN SUPPLY When supply decreases a smaller quantity is

supplied at every price.

The result is an increase in price to $4.00 and a decrease in quantity to 200.