ECON-2110 Lecture Notes - Lecture 9: Excess Supply, Shortage, Demand Curve

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27 Dec 2015
ECON 2110: Intro to Microeconomics
September 30
Topic 3c: Putting Supply and Demand together - “Where do prices come from?”
“Equilibrium” price and quantity =
- in markets, we see ONE price
1. What happens where D and S intersect? (Demand and Supply curves)
The intersection = equilibrium (which is market price and quantity…
what we see on market)
Quantity supplied > Quantity demanded ---- excess supply (more units
for sale than demanded)
QS < QD ---- excess demand (more units demanded than are supplied)
** If we see change in either price or quantity in a market, we can conclude
that supply or demand has changed
Topic 3d: Shifts in Demand and Supply OR “Why do market prices and quantities
change?” (Why&How)
Remember: equilibrium is where Qd = Qs
Law of Supply and Demand: price of any good adjusts to bring quantities of
the good supplied and demanded into balance
Excess demand – price bid up Excess supply – price bid down
If we are in equilibrium, why do prices change? Demand or supply
1. Changes in P and Q are frequent
Soybean prices fall..why? good crops = more supply = prices fall
2. Why do Supply and Demand change?
a. D and S curves are ceterus paribus (all else held constant) concepts
b. Demand – MB/WTP MB change = D changes
c. Supply – MC/WTS MC change = S changes
Demand / Supply curves will shift
3. Factors that Shift Demand
a. Tastes and Preferences – not subject to dispute
Unobservable (not useful for predictions)
Demand curve drawn with tastes held constant
b. Income / Wealth
When people become wealthier, demand for a good may rise or
fall depending
Normal good = demand increases when income increases
Example: designer purses, jewelry, etc
Inferior good = demand decreases when income increases
Example: Ramen noodles
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