MACROECONOMICS

1

• MACROECONOMICS
• 231

2
TOPIC 3

• SUPPLY
• and
• DEMAND

3
Market Equilibrium

• Equilibrium in a market occurs when the price
  balances the plans of buyers and sellers.
• Equilibrium price is the price at which quantity
  demanded equals quantity supplied.
• Equilibrium quantity is the quantity bought and
  sold at the equilibrium price.

4
Market Equilibrium

• Price as a Regulator
• If the price is too low, quantity demanded
  exceeds quantity supplied.
• If the price is too high, quantity supplied
  exceeds quantity demanded.

5
Market Equilibrium

• Quantity Quantity Shortage()
• Price demanded supplied or
  surplus()
• (dollars
• per tape) (millions of tapes per week)
• 1 9 0
• 2 6 3
• 3 4 4
• 4 3 5
• 5 2 6

6
Market Equilibrium

• Quantity Quantity Shortage()
• Price demanded supplied or
  surplus()
• (dollars
• per tape) (millions of tapes per week)
• 1 9 0 9
• 2 6 3 3
• 3 4 4 0
• 4 3 5 2
• 5 2 6 4

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Market Equilibrium
6
5
Price (dollar per tape)
4
3
2
1
0 2 4 6 8 10
Quantity (millions of tapes per week)
8
Market Equilibrium
6
5
Price (dollar per tape)
4
3
2
Demand for tapes
1
0 2 4 6 8 10
Quantity (millions of tapes per week)
9
Market Equilibrium
6
Supply of Tapes
5
Price (dollar per tape)
4
3
2
Demand for tapes
1
0 2 4 6 8 10
Quantity (millions of tapes per week)
10
Market Equilibrium
6
Supply of Tapes
5
Price (dollar per tape)
4
3
2
Demand for tapes
1
0 2 4 6 8 10
Quantity (millions of tapes per week)
11
Market Equilibrium
Surplus of 2 million tapes at 4 a tape
6
Supply of Tapes
5
Price (dollar per tape)
4
3
2
Demand for tapes
1
0 2 4 6 8 10
Quantity (millions of tapes per week)
12
Market Equilibrium
Surplus of 2 million tapes at 4 a tape
6
Supply of Tapes
5
Price (dollar per tape)
4
Equilibrium
3
2
Demand for tapes
1
Shortage of 3 million tapes at 2 a tape
0 2 4 6 8 10
Quantity (millions of tapes per week)
13
Market Equilibrium

• Price Adjustments
• A shortage forces the price up.
• A surplus forces the price down.
• Such price changes are mutually beneficial to
  both buyers and sellers.

14
Predicting Changes in Price and Quantity

• A Change in Demand
• What would happen to the price and quantity of
  tapes if the price of a Walkman falls from 200
  to 50.

15
The Effects of a Change in Demand

• Quantity demanded
• Price (millions of tapes per week)
• (dollars Quantity supplied
• per tape ) Walkman 200 Walkman 50
  (millions of tapes per week)
• 1 9 0
• 2 6 3
• 3 4 4
• 4 3 5
• 5 2 6

16
The Effects of a Change in Demand

• Quantity demanded
• Price (millions of tapes per week)
• (dollars Quantity supplied
• per tape ) Walkman 200 Walkman 50
  (millions of tapes per week)
• 1 9 13 0
• 2 6 10 3
• 3 4 8 4
• 4 3 7 5
• 5 2 6 6

17
The Effects of a Change in Demand
Supply of tapes
6
5
Price (dollar per tape)
4
3
2
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
18
The Effects of a Change in Demand
Supply of tapes
6
5
Price (dollar per tape)
4
3
2
Demand for tapes (Walkman 50)
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
19
The Effects of a Change in Demand
Supply of tapes
6
5
Price (dollar per tape)
4
3
2
Demand for tapes (Walkman 50)
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
20
A Change in Demand

• Prediction
• When demand increases, both the price and
  quantity increase.
• When demand decreases, both the price and
  quantity decrease.

21
Predicting Changes in Price and Quantity

• A Change in Supply
• What would happen to the price and quantity of
  tapes if a new cost-saving production technology
  was developed?

22
The Effects of a Change in Supply

• Quantity supplied
• Price (millions of tapes per week)
• (dollars Quantity demanded old new
• per tape ) (millions of tapes per week)
  technology technology
  
• 1 9 0
• 2 6 3
• 3 4 4
• 4 3 5
• 5 2 6

23
The Effects of a Change in Supply

• Quantity supplied
• Price (millions of tapes per week)
• (dollars Quantity demanded old new
• per tape ) (millions of tapes per week)
  technology technology
  
• 1 9 0 3
• 2 6 3 6
• 3 4 4 8
• 4 3 5 10
• 5 2 6 12

24
The Effects of a Change in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
2
1
Demand for tapes
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
25
The Effects of a Change in Supply
Supply of tapes (old technology)
Supply of tapes (new technology)
6
5
Price (dollar per tape)
4
3
2
1
Demand for tapes
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
26
The Effects of a Change in Supply
Supply of tapes (old technology)
Supply of tapes (new technology)
6
5
Price (dollar per tape)
4
3
2
1
Demand for tapes
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
27
A Change in Supply

• Prediction
• When supply increases, the quantity increases and
  the price falls.
• When supply decreases, the quantity decreases and
  the price rises

28
Predicting Changes in Price and Quantity

• A Change in Both Demand and Supply
• What would happen if both demand and supply
  change together?

29
The Effects of an Increase in Both Demand and
Supply

• Original Quantities New Quantities
• (millions of tapes per week)
  (millions of tapes per week)
• Price Quantity Quantity Quantity
  Quantity
• (dollars demanded supplied demanded
  supplied
• per tape ) Walkman old
  Walkman new
• 200 technology 50
  technology
• 1 9 0
• 2 6 3
• 3 4 4
• 4 3 5
• 5 2 6

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The Effects of an Increase in Both Demand and
Supply

• Original Quantities New Quantities
• (millions of tapes per week)
  (millions of tapes per week)
• Price Quantity Quantity Quantity
  Quantity
• (dollars demanded supplied demanded
  supplied
• per tape ) Walkman old
  Walkman new
• 200 technology 50
  technology
• 1 9 0 13 3
• 2 6 3 10 6
• 3 4 4 8 8
• 4 3 5 7 10
• 5 2 6 6 12

31
The Effects of an Increase in Both Demand and
Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
2
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
32
The Effects of an Increase in Both Demand and
Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
2
Demand for tapes (Walkman 50)
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
33
The Effects of an Increase in Both Demand and
Supply
Supply of tapes (old technology)
Supply of tapes (new technology)
6
5
Price (dollar per tape)
4
3
2
Demand for tapes (Walkman 50)
1
Demand for tapes (Walkman 200)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
34
A Change in Both Demand and Supply

• Prediction
• When both demand and supply increase, the
  quantity increases and the price decreases, or
  remains constant.
• When both demand and supply decreases, the
  quantity decreases and the price increases,
  decreases, or remains constant.

35
The Effects of an Decrease in Demand and an
Increase in Supply

• Original Quantities New Quantities
• (millions of tapes per week)
  (millions of tapes per week)
• Price Quantity Quantity Quantity
  Quantity
• (dollars demanded supplied demanded
  supplied
• per tape ) CD player old CD
  player new
• 400 technology 200
  technology
• 1 13 0
• 2 10 3
• 3 8 4
• 4 7 5
• 5 6 6

36
The Effects of an Decrease in Demand and an
Increase in Supply

• Original Quantities New Quantities
• (millions of tapes per week)
  (millions of tapes per week)
• Price Quantity Quantity Quantity
  Quantity
• (dollars demanded supplied demanded
  supplied
• per tape ) CD player old CD
  player new
• 400 technology 200
  technology
• 1 13 0 9 3
• 2 10 3 6 6
• 3 8 4 4 8
• 4 7 5 3 10
• 5 6 6 2 12

37
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
Demand for tapes (CD player 400)
2
1
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
38
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
4
3
Demand for tapes (CD player 400)
2
1
Demand for tapes (CD player 400)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
39
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes (old technology)
6
5
Price (dollar per tape)
Supply of tapes (new technology)
4
3
Demand for tapes (CD player 400)
2
1
Demand for tapes (CD player 400)
0 2 4 6 8 10 12
14
Quantity (millions of tapes per week)
40
The Effects of a Decrease in Demand and an
Increase in Supply

• Prediction
• When demand decreases and supply increases, the
  price falls and the quantity increases,
  decreases, or remains constant.
• When demand increases and supply decreases, the
  price rises and the quantity increases,
  decreases, or remains constant.

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