CV 2014 July 20

EQUILIBRIUM key concept to say something is in equilibrium is to say that the dynamic forces pushing on it cancel each other out in supply and demand analysis, equilibrium means that the upward pressure on price is exactly offset by the downward pressure on price EQUILIBRIUM PRICE price towards which the invisible hand drives the market SURPLUS excess of quantity supplied over quantity demanded what happens next: with all those extra boxes of corn flakes piling up in their warehouses, firms will start lowering their price and they will keep lowering it right up until a point where the surplus disappears SHORTAGE excess of quantity demanded over quantity supplied what happens next: with consumers clamoring for their product firms will raise the price and they will keep on raising the price right up until it reaches the point where supply and demand are in balance EFFECT OF A SHIFT IN SUPPLY OR DEMAND apparatus of supply and demand is powerful in predicting changes in market system (A)supply shift due to bad weather: price rises bad harvest causes bakers to produce less bread at the old price shortage occurs: quantity demanded exceeds quantity supplied price of bread rises: this encourage bread production, raising quantity supplied raise in bread price simultaneously discourages consumption and lowers quantity demanded prices continues to rise until at new equilibrium price amounts demanded and supplied are once again equal (B)new technology shifts supply curve: price falls new baking technology lowers costs and therefore increases supply surplus occurs: supply curve shifts down into the right Demand rises, Price rises, Quantity rises Demand falls, Price falls, Quantity falls Supply rises, Price falls, Quantity rises Supply falls, Price rises, Quantity falls