ME IBS Demand, Supply & Equilibrium July 2011
Transcript of ME IBS Demand, Supply & Equilibrium July 2011
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Supplyand Demand
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The Law of DemandThe law of demand holds that other
things equal, as the price of a good or
service rises, its quantity demandedfalls.
The reverse is also true: as the price
of a good or service falls, its quantitydemanded increases.
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Demand Curve
The demand curve has a negative slope,consistent with the law of demand.
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The Law of SupplyThe law of supplyholds that other
things equal, as the price of a good
rises, its quantity supplied will rise,and vice versa.
Why do producers produce moreoutput when prices rise? They seek higher profits
They can cover higher marginal costs ofproduction
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Supply Curve
The supply curve has a positive slope,consistent with the law of supply.
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Equilibrium
In economics, an equilibriumis asituation in which:
there is no inherent tendency tochange,
quantity demanded equals quantitysupplied, and
the market just clears.
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Equilibrium
Equilibrium occurs at a price of $3 and aquantity of 30 units.
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Shortages and Surpluses A shortageoccurs when quantity
demanded exceeds quantity supplied.
A shortage implies the market price istoo low.
A surplusoccurs when quantity suppliedexceeds quantity demanded.
A surplus implies the market price is toohigh.
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Shift in the Demand Curve
A change in any variable other thanprice that influences quantitydemanded produces a shift in thedemand curveor a change in demand
Factors that shift the demand curveinclude:Change in consumers income
Consumer preferencesPrices of related goods:
Substitutes: goods consumed in place ofone another
Complements: goods consumed jointly 9
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Shift in the Demand Curve
This demand curve has shifted to the right. Quantitydemanded is now higher at any given price.
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Equilibrium After a Demand Shift
The shift in the demand curve moves themarket equilibrium from point A to point B,resulting in a higher price and higher quantity.
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Shift in the Supply Curve
A change in any variable other than pricethat influences quantity supplied produces
a shift in the supply curveor a change insupply.
Factors that shift the supply curve include:
Change in input costs
Increase in technology
Change in size of the industry
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Shift in the Supply Curve
For an given rental price, quantity supplied isnow lower than before.
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Equilibrium After a Supply Shift
The shift in the supply curve moves the marketequilibrium from point A to point B, resulting in a higherprice and lower quantity.
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Price Ceilings & Floors
Aprice ceilingis a legal maximum that canbe charged for a good.
Results in a shortage of a product
Common examples include apartmentrentals and credit cards interest rates.
Aprice flooris a legal minimum that can becharged for a good.
Results in a surplus of a productCommon examples include soybeans,
milk, minimum wage
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Price Ceiling
A price ceiling is set at $2 resulting ina shortage of 20 units.
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Price Floor
A price floor is set at $4 resulting in asurplus of 20 units.
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