Supply and Demand together at last SUPPLY and

Supply and Demand together at last!

SUPPLY and demand TOGETHER • These two laws are directly contrary to each other. If suppliers want high prices, but buyers want low prices, how on earth does anything get traded? • The point where: quantity supplied = quantity demanded supply demand

Supply and demand EOC stud y guide Supply & Demand #4 • Market Equilibrium (aka market clearing price) • The point at which sellers are willing to sell as much as buyers are willing to buy • Qd=Qs

Moving Toward Equilibrium EO Sup C study ply & gu Dem ide and #7 • Surplus is the condition in which the quantity supplied of a good is greater than the quantity demanded. Surpluses occur only at prices above equilibrium. • Shortage is the condition in which the quantity demanded of a good is greater than the quantity supplied. Shortage occur only at prices below equilibrium price.

Supply and Demand Interactions Relationship of quantity supplied Market (Qs) to quantity demanded (Qd) Condition Q s Qd Surplus Q d Qs Shortage Q d = Qs Equilibrium

Supply and demand • Equilibrium or market clearing price • How difficult is it to find this point? • It is the single most difficult aspect of business • All trial and error • “In the Chips” Activity • You will need a piece of paper and a pencil

Surplus (a. k. a. excess supply): when quantity supplied is greater than quantity demanded P Example: S D Surplus If P = $5, then QD = 9 lattes and QS = 25 lattes resulting in a surplus of 16 lattes Q

Surplus (a. k. a. excess supply): P D Surplus S Facing a surplus, sellers try to increase sales by cutting price. This causes QD to rise and QS to fall… …which reduces the surplus. Q

Surplus (a. k. a. excess supply): P D Surplus S Facing a surplus, sellers try to increase sales by cutting price. This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. Q

What happens to price when there is a surplus? • Surplus • Suppliers cannot sell all of their goods • Inventory grows • Expensive to store • What happens to price? • It lowers to the equilibrium price

Shortage (a. k. a. excess demand): P when quantity demanded is greater than quantity supplied Example: S D If P = $1, then QD = 21 lattes and QS = 5 lattes resulting in a shortage of 16 lattes Shortage Q

Shortage (a. k. a. excess demand): P D S Facing a shortage, sellers raise the price, causing QD to fall and QS to rise, …which reduces the shortage. Shortage Q

Shortage (a. k. a. excess demand): P D S Facing a shortage, sellers raise the price, causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. Shortage Q

What happens to price when there is a shortage? • Shortage • Price is below equilibrium causing a high demand for the good and a low supply • Buyers will pay higher prices for goods • Higher prices motivate suppliers to produce more • Price will rise until it reaches equilibrium