Equilibrium Price and Quantity
Demand for Pizzas Q U A N T PR I I T C Y E $ 3 0. 0
Demand Curve • As the price rises, people are willing to buy fewer pizzas. • As the price of pizza changes, move along the demand curve
Supply of Pizza Qu a n t i t Pric y e $5. 0 0 0 $10. 10 0 $15.
SUPPLY • At a higher price the firm is willing to supply more pizza. • As price of pizza changes, move along the supply curve
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 DEMAN D $0. 00 0 500 $5. 00 0 400 $10. 00 100 300 $15. 00 200 $20. 00 300 100 $25. 00 400 0 $30. 00 500 0
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.
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.
Method of determining changes in equilibrium price and quantity 1. 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. ) 2. 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 one will shift. 3. Decide whether the change shifts the curve out, or shifts the curve in. 4. Draw the new supply or demand curve and indicate the new equilibrium price and quantity. 5. Write the explanation telling why the curve shifted and gave a new equilibrium. 6. Read your diagram to make sure you are telling a logical story.
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
The Blueberry Market Pe=$. 45 Qe=800 Price Supply Demand $ 0. 05 $ 0. 15 $ 0. 25 0 200 400 1600 1400 1200 $ 0. 35 $ 0. 45 $ 0. 55 $ 0. 65 $ 0. 75 $ 0. 85 600 800 1000 1200 1400 1600 1000 800 600 400 200 0
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
Response to fall in pesticide price 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
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
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
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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