ECO2011 Basic Microeconomics

Fall 2020
Emily Zheng
Surplus

If the price of a tablet is

$600, consumers want to
buy 4 million per month,
while producers want to
sell 6 million.

This gives a surplus of 2

million tablets.

Prediction: sellers will

compete amongst
themselves, driving the
price down.
Shortage

If the price of a tablet is

$300, consumers want to
buy 7 million per month,
while producers want to
sell 3 million.

This gives a shortage of 4

million tablets.

Prediction: sellers will

realize they can increase
the price and still sell as
many tablets, so the price
will rise.
Market equilibrium

At a price of $500,
consumers want to buy
5 million tablets, and
producers want to sell 5
million.

There is no reason for

the price to change.

Equilibrium price:
$500

Equilibrium quantity:
5 million per month
EQUILIBRIUM

● equilibrium (or market clearing) price Price that equates the quantity
supplied to the quantity demanded.

● market mechanism Tendency in a free market for price to change until the
market clears.

● surplus Situation in which the quantity supplied exceeds the quantity

demanded.

● shortage Situation in which the quantity demanded exceeds the quantity

supplied.
Who determines price, buyers or sellers?

Price is determined by the interaction of buyers and sellers.

Neither group can dictate price in a competitive market (i.e. one

with many buyers and sellers).

However changes in supply and/or demand will affect the price

and quantity traded.
Usefulness of the supply and demand model

Predictions about price and quantity in model require us to know

supply and demand curves.

Typically, we know price and quantity, but do not know the curves
that generate them.

The power of the supply and demand model is in its ability to

predict directional changes in price and quantity traded.
The effect of shifts in supply on equilibrium

Toshiba enters the tablet

computer market,
introducing the Thrive.

More tablets are available

at any given price – an
increase in supply from S1
to S2.

Equilibrium price falls

from P1 to P2.

Equilibrium quantity rises

from Q1 to Q2.
The effect of shifts in supply on equilibrium

By how much will price

fall? By how much will
quantity rise?

We cannot say, without

knowing more
information.

For now, we can only

predict that price will
fall and quantity traded
will rise.
The effect of shifts in demand on equilibrium

Consumer incomes
increase. What happens
to equilibrium in the
tablet market?

Tablets are normal

goods, so as income
rises, demand rises
(D1 to D2).

Equilibrium price rises (P1

to P2).

Equilibrium quantity rises

(Q1 to Q2).
Effects of shifts in demand and supply

Supply Curve Supply Curve Shifts Supply Curve Shifts

Unchanged to the Right to the Left

Demand Curve Q unchanged Q↑ Q↓

Unchanged P unchanged P↓ P↑

Demand Curve Shifts

to the Right Q↑
P↑

Demand Curve Shifts Q↓

to the Left P↓
 Making
the The Falling Price of Blu-ray Players
Connection

From 2006 to 2010, the price of Blu-

ray players fell from almost $1000 to
about $120, while the number of
Blu-ray players traded increased
dramatically.

What best explains this change?

A: Increase in demand
B: Decrease in demand
C: Increase in supply
D: Decrease in supply

Can you show this change on a

supply-and-demand diagram?
 Making
the The Falling Price of Blu-ray Players
Connection

Supply increased as additional firms started manufacturing Blu-ray

players and input costs fell.
Simultaneous shifts in supply and demand
Suppose supply and demand
both increase.

What does our model predict?

S↑  ( P↓ and Q↑ )

D↑  ( P↑ and Q↑ )

So we can be sure equilibrium

quantity will rise; but the effect
on equilibrium price is not
clear.
In this graph, demand moves
Effect on price depends on more than supply.
how far each curve moves.
Simultaneous shifts in supply and demand

Suppose supply and demand

both increase.

What does our model predict?

S↑  ( P↓ and Q↑ )

D↑  ( P↑ and Q↑ )

So we can be sure equilibrium

quantity will rise; but the effect
on equilibrium price is not
clear.
In this graph, supply moves
more than demand.
Effect on price depends on
how far each curve moves.
Effects of shifts in demand and supply

Supply Curve Supply Curve Shifts Supply Curve Shifts

Unchanged to the Right to the Left

Demand Curve Q unchanged Q↑ Q↓

Unchanged P unchanged P↓ P↑

Demand Curve Shifts Q↑ Q↑ Q effect uncertain

to the Right P↑ P effect uncertain P↑

Demand Curve Shifts Q↓ Q effect uncertain Q↓

to the Left P↓ P↓ P effect uncertain
Supply and demand shifts over time

Over time, it is common for both supply and demand to shift.

The stronger of the two effects will determine the overall change in
price and quantity.
Common misconceptions to avoid

Terminology: movement along the curve (caused by price change)

vs. shifting the curve (caused by other changes).

Not moving curves far enough to be able to illustrate a change.

Exaggerating curve shifts is okay.

Incompletely labeling diagrams.

Use your arrows!

Being certain of both price and quantity changes when both

demand and supply curves move.
Only one of these effects will be certain.
Exercise
1. Bacon is used to produce bacon cheeseburgers, and the price of bacon
decreases. In the market for bacon cheeseburgers you would expect that
A) the demand for bacon cheeseburgers would increase and the price of
bacon cheeseburgers would increase.
B) the demand for bacon cheeseburgers would decrease and the price of
bacon cheeseburgers would fall.
C) the supply of bacon cheeseburgers would decrease and the price of
bacon cheeseburgers would increase.
D) the supply of bacon cheeseburgers would increase and the price of
bacon cheeseburgers would decrease.
Exercise
2. A new fertilizer which greatly improves the corn crop yield is being
widely used by corn farmers. You accurately predict that this
A) will shift the supply curve of corn to the right, the equilibrium price
of corn will increase, and the demand for corn will fall.
B) will shift the supply curve of corn to the right, the equilibrium price
of corn will decrease, and the quantity demanded of corn will increase.
C) will shift the supply curve of corn to the left, the equilibrium price of
corn will increase, and the quantity demanded of corn will decrease.
D) will shift the supply curve of corn to the left, the equilibrium price of
corn will increase, and the demand for corn will fall.
Exercise
3. Suppose the demand curve for a product is given by Q=400-2P. The
supply curve is Q=3P-50. Please calculate the market-clearing price and
quantity for the product.