Transcript Ch6Sec2

Lesson Objectives:
By the end of this lesson you will be able to:
*Explain Why a free market naturally tends to move toward
equilibrium.
*Analyze how a market reacts to an increase or decrease in
supply.
*Analyze how a market reacts to an increase or decrease in
demand.
Moving Toward Equilibrium
Economists say that a market will tend to move toward equilibrium, which means that the price
and quantity will gradually move toward their equilibrium levels.
There are two factors that can push a market into equilibrium:
1. A shift in the entire demand curve.
2. A shift in the entire supply curve.
Example of a product that has experienced a market change:
The Digital Camera
Digital cameras were first introduced into the consumer market
In 1994. These early cameras were extremely expensive and the
picture quality was not very high. Over time, technology improved
and by the year 2000, the Picture quality was better and the
cameras were cheaper because advances in technology lowered
the cost of manufacturing.
Finding A New Equilibrium
Digital cameras evolved from an expensive luxury good to a mid
priced good when new computer technology reduced the cost of
Production. The lower price of manufacturing made producers
willing to supply a larger quantity of cameras.
Changing Equilibrium
As improved technology caused the price of digital cameras to fall, sales increased.
How does a market react to a shortage????
When supply & demand are balanced a market is at equilibrium. But a sudden change in supply
or demand can result in a shortage. How does the market react?
1. Disequilibrium- The market is thrown out of balance.
For example: More people need warm coats during a cold winter.
2. This may cause a decrease in supply which is called a Shortage.
3. People react to a shortage with panic. They line up at the stores to purchase the hard to
find item. Stores react by raising the price of the hard to find item.
4. If the shortage continues other suppliers try to enter the market by making the product in
demand.
5. In time, supply & demand will balance out and a new equilibrium will be created.