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Lecture Economics: The basics (2/e): Chapter 3 - Michael Mandel

Chapter 3 - Market equilibrium and shifts. After reading the material in this chapter, you should be able to: Define excess supply and excess demand, explain market equilibrium, and identify the equilibrium point on a supply-demand diagram, describe the impact of supply and demand shifts, discuss some causes of market shifts,. | Chapter 3 Market Equilibrium and Shifts McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define excess supply and excess demand. Explain market equilibrium, and identify the equilibrium point on a supply-demand diagram. Describe the impact of supply and demand shifts. Discuss some causes of market shifts. Illustrate how changes in income affect the demand curve. Review the basics of elasticity. 3- Matching Supply and Demand Buyers and sellers are the two sides of markets. Buyers determine demand. Sellers determine supply. The buying and selling decisions are made independently. Thus, there is no reason why the amount buyers want to purchase is equal to the amount sellers want to produce. 3- Matching Supply and Demand Since the purchase and production decisions are independent, quantity demanded need not equal quantity supplied. There are 3 possible cases: The case of excess demand The case of excess supply The case of market equilibrium 3- The Case of Excess Demand Excess demand occurs when, at a given price, buyers want to purchase more of a good or service than sellers are prepared to supply. Excess demand means that at a given price, quantity demanded exceeds quantity supplied. In this case, the market is in disequilibrium and prices are under upward pressure. 3- The Case of Excess Supply Excess supply occurs when, at a given price, sellers want to produce more of a good or service than buyers are willing to purchase. Excess supply means that at a given price, quantity supplied exceeds quantity demanded. In this case, the market is in disequilibrium and prices are under downward pressure. 3- Eliminating Excess Demand or Excess Supply The gap between quantity demanded and quantity supplied is closed by the market mechanism through changes in prices. Adam Smith, in The Wealth of Nations, used the term invisible hand to describe the market mechanism. Individual actions by buyers and | Chapter 3 Market Equilibrium and Shifts McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define excess supply and excess demand. Explain market equilibrium, and identify the equilibrium point on a supply-demand diagram. Describe the impact of supply and demand shifts. Discuss some causes of market shifts. Illustrate how changes in income affect the demand curve. Review the basics of elasticity. 3- Matching Supply and Demand Buyers and sellers are the two sides of markets. Buyers determine demand. Sellers determine supply. The buying and selling decisions are made independently. Thus, there is no reason why the amount buyers want to purchase is equal to the amount sellers want to produce. 3- Matching Supply and Demand Since the purchase and production decisions are independent, quantity demanded need not equal quantity supplied. There are 3 possible cases: The case of excess demand The case of excess supply The case