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Equilibrium Price and Quantity

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Title: Equilibrium Price and Quantity


1
Equilibrium Price and Quantity
2
Demand for Pizzas
QUANTITY PRICE
0 30.00
100 25.00
200 20.00
300 15.00
400 10.00
500 5.00
3
Demand Curve
  • As the price rises, people are willing to buy
    fewer pizzas.
  • As the price of pizza changes, move along the
    demand curve

4
Supply of Pizza
Quantity Price
0 5.00
100 10.00
200 15.00
300 20.00
400 25.00
500 30.00
600 35.00
5
SUPPLY
  • At a higher price the firm is willing to supply
    more pizza.
  • As price of pizza changes, move along the supply
    curve

6
Equilibrium Price and Quantity
  • At low prices, people will want to buy more than
    people want to sell.
  • Competition to buy will drive prices up.
  • At high prices, people will want to sell more
    than people will want to buy
  • Competition to sell will drive prices down
  • Only when the quantity people want to sell equals
    the quantity people want to buy will price stop
    changing be in equilibrium.

PRICE SUPPLY DEMAND
0.00 0 500
5.00 0 400
10.00 100 300
15.00 200 200
20.00 300 100
25.00 400 0
30.00 500  0
7
Equilibrium price and quantity
  • At low prices, people will want to buy more than
    people want to sell.
  • Competition to buy will drive prices up.
  • At high prices, people will want to sell more
    than people will want to buy
  • Competition to sell will drive prices down
  • Only when the quantity people want to sell equals
    the quantity people want to buy will price stop
    changing be in equilibrium.

8
Changes in Equilibrium
  • A given supply and demand relationship will
    establish one equilibrium price and quantity.
  • That price and quantity will not change, so long
    as none of the determinants of demand or supply
    change.
  • If the determinants of demand or supply change,
    then the equilibrium price and quantity will
    change.

9
Method of determining changes in equilibrium
price and quantity
  • Draw the diagram for the market.
  • Show the initial equilibrium price and quantity.
    Label the axes. Be sure to indicate the product
    that goes on the X axis (Check that the D curve
    has a negative slope and the S curve has a
    positive slope.)
  • Decide whether the change will affect the demand
    curve or the supply curve.
  • Does it change how much people will wish to buy
    at each price or how much they wish to sell?
    Usually only one will shift.
  • Decide whether the change shifts the curve out,
    or shifts the curve in.
  • Draw the new supply or demand curve and indicate
    the new equilibrium price and quantity.
  • Write the explanation telling why the curve
    shifted and gave a new equilibrium.
  • Read your diagram to make sure you are telling a
    logical story.

10
Examples for the blueberry market.
  • Change The price of strawberries rises.
  • Change The price of cherries, a close substitute
    of blueberries, falls sharply
  • Change The price of whip cream, a complement of
    blueberries, falls sharply
  • Change The cost of pesticides to control bugs on
    the blueberry crop falls.
  • Change Incomes in Nova Scotia increase.
  • Change wage rates paid to blueberry pickers
    rise.
  • Change The cost of labour to harvest blueberries
    rises sharply
  • Change A clever farmer designs a new blueberry
    harvesting machine which can harvest berries more
    efficiently

11
The Blueberry Market Pe.45 Qe800
Price Supply Demand
0.05 0 1600
0.15 200 1400
0.25 400 1200
0.35 600 1000
0.45 800 800
0.55 1000 600
0.65 1200 400
0.75 1400 200
0.85 1600 0
12
Response to fall in the cherry price
  • Since the price of a substitute has fallen,
    people want to buy fewer blueberries at every
    price
  • Competition to sell drives price down
  • New Pe .40
  • New Qe 700

13
Response to fall in pesticide price
Since the cost of production has fallen, people
want to sell more blue-berries at every price.
Competition to sell drives price down New Pe
.40 New Qe 900
14
Response to rise in wage rates of blueberry
pickers
  • Since the cost of production has risen, people
    want to sell fewer blueberries at every price
  • Competition to buy at old price drives price up
  • New Pe .50
  • New Qe 700

15
Response to rise in Canadian incomes
  • Since incomes have risen, people want to buy more
    blueberries at every price
  • Competition to buy at old price drives price up
  • New Pe .50
  • New Qe 700

16
Response to better harvesting machine
  • Since the cost of production has fallen, people
    want to sell more blueberries at every price.
    Competition to sell drives price down
  • New Pe .40
  • New Qe 900
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