Transcript Equilibrium Price and Quantity

Equilibrium Price and Quantity
Demand for Pizzas
QUANTITY
PRICE
0
$ 30.00
100
$ 25.00
200
$ 20.00
300
$ 15.00
400
$ 10.00
500
$
5.00
Demand Curve
DEMAND FOR PIZZA
$40.00
$35.00
PRICE OF ONE PIZZA
• As the price rises,
people are willing to
buy fewer pizzas.
• As the price of pizza
changes, move along
the demand curve
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0
100 200 300 400 500 600
QUANTITY PIZZAS PER WEEK
Supply of Pizza
Quantity
Price
0
$5.00
100
$10.00
200
$15.00
300
$20.00
400
$25.00
500
$30.00
600
$35.00
SUPPLY
SUPPLY
PRICE OF PIZZA
• At a higher price the
firm is willing to
supply more pizza.
• As price of pizza
changes, move along
the supply curve
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
0
100
200
300
400
500
QUANTITY OF PIZZA
600
700
Equilibrium Price and Quantity
• At low prices, people will want
to buy more than people want
to sell.
• Competition to buy will drive
prices up.
• At high prices, people will want
to sell more than people will
want to buy
• Competition to sell will drive
prices down
• Only when the quantity people
want to sell equals the quantity
people want to buy will price
stop changing– be in
equilibrium.
PRICE
SUPPLY
DEMAND
$0.00
0
500
$5.00
0
400
$10.00
100
300
$15.00
200
200
$20.00
300
100
$25.00
400
0
$30.00
500
0
Equilibrium price and quantity
MARKET FOR PIZZAS
PRICE OF PIZZA
• At low prices, people will want
to buy more than people want
to sell.
• Competition to buy will drive
prices up.
• At high prices, people will want
to sell more than people will
want to buy
• Competition to sell will drive
prices down
• Only when the quantity people
want to sell equals the quantity
people want to buy will price
stop changing – be in
equilibrium.
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
SUPPLY
DEMAND
0 100 200 300 400 500
QUANTITY OF PIZZA
Changes in Equilibrium
• A given supply and demand relationship
will establish one equilibrium price and
quantity.
• That price and quantity will not change, so
long as none of the determinants of
demand or supply change.
• If the determinants of demand or supply
change, then the equilibrium price and
quantity will change.
Method of determining changes in
equilibrium price and quantity
1. Draw the diagram for the market.
•
Show the initial equilibrium price and quantity. Label the axes. Be sure
to indicate the product that goes on the X axis (Check that the D curve
has a negative slope and the S curve has a positive slope.)
2. Decide whether the change will affect the demand curve or the
supply curve.
•
Does it change how much people will wish to buy at each price or how
much they wish to sell? Usually only one will shift.
3. Decide whether the change shifts the curve out, or shifts the curve
in.
4. Draw the new supply or demand curve and indicate the new
equilibrium price and quantity.
5. Write the explanation telling why the curve shifted and gave a new
equilibrium.
6. Read your diagram to make sure you are telling a logical story.
Examples for the blueberry
market.
• Change: The price of strawberries rises.
• Change: The price of cherries, a close substitute of
blueberries, falls sharply
• Change: The price of whip cream, a complement of
blueberries, falls sharply
• Change: The cost of pesticides to control bugs on the
blueberry crop falls.
• Change: Incomes in Nova Scotia increase.
• Change: wage rates paid to blueberry pickers rise.
• Change: The cost of labour to harvest blueberries rises
sharply
• Change: A clever farmer designs a new blueberry
harvesting machine which can harvest berries more
efficiently
The Blueberry Market
Pe=$.45 Qe=800
Supply
Demand
$
$
$
$
0.05
0.15
0.25
0.35
0
200
400
600
1600
1400
1200
1000
$
$
$
0.45
0.55
0.65
800
1000
1200
800
600
400
$
$
0.75
0.85
1400
1600
200
0
BLUEBERRY MARKET
$0.90
PRICE OF BLUEBERRIES
Price
$0.80
$0.70
S
$0.60
$0.50
$0.40
$0.30
D
$0.20
$0.10
$0
200
400
600
800
1000 1200 1400
QUANTITY BLUEBERRIES
Response to fall in the cherry price
BLUEBERRY MARKET
PRICE OF BLUEBERRIES
• Since the price of a
substitute has fallen,
people want to buy
fewer blueberries at
every price
• Competition to sell
drives price down
• New Pe = $.40
• New Qe= 700
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$-
S
D1'
D2
0
200 400 600 800 1000 1200 1400
QUANTITY BLUEBERRIES
Response to fall in pesticide price
BLUEBERRY MARKET
PRICE OF BLUEBERRIES
Since the cost of
production has
fallen, people want
to sell more blueberries at every
price. Competition
to sell drives price
down
New Pe = $.40
New Qe= 900
$0.90
$0.80
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$-
S
S'
D
0
200 400 600 800 1000 1200 1400
QUANTITY BLUEBERRIES
Response to rise in wage rates of
blueberry pickers
BLUEBERRY MARKET
$0.90
PRICE OF BLUEBERRIES
• Since the cost of
production has risen,
people want to sell
fewer blueberries at
every price
• Competition to buy at
old price drives price
up
• New Pe = $.50
• New Qe= 700
$0.80
S'
$0.70
S
$0.60
$0.50
$0.40
$0.30
$0.20
D
$0.10
$0
200 400 600 800 1000 1200 1400
QUANTITY BLUEBERRIES
Response to rise in Canadian
incomes
BLUEBERRY MARKET
PRICE OF BLUEBERRIES
• Since incomes have
risen, people want to
buy more blueberries
at every price
• Competition to buy at
old price drives price
up
• New Pe = $.50
• New Qe= 700
$1.00
$0.90
$0.80
$0.70
$0.60
S
$0.50
$0.40
$0.30
$0.20
$0.10
$-
D'
D
0
200 400 600 800 1000 1200 1400
QUANTITY BLUEBERRIES
Response to better harvesting
machine
BLUEBERRY MARKET
$0.90
PRICE OF BLUEBERRIES
• Since the cost of
production has fallen,
people want to sell
more blueberries at
every price.
Competition to sell
drives price down
• New Pe = $.40
• New Qe= 900
$0.80
S
$0.70
$0.60
S'
$0.50
$0.40
$0.30
D
$0.20
$0.10
$0
200 400 600 800 1000 1200 1400
QUANTITY BLUEBERRIES