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Changes in Equilibrium

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Jessica J. Darby

on 18 March 2015

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Transcript of Changes in Equilibrium

Changes in Equilibrium
*Equilibrium for most products is in constant motion
In a free market, price and quantity will tend to move toward equilibrium whenever they find themselves in disequilibrium.
Review
What 2 things will happen when a market finds itself in disequilibrium?
Shortages cause a firm or market to ________ its prices to restore equilibrium.
Shortage or Surplus
Shortage or Surplus
raise
Review
lower
*Think of equilibrium as a “moving target” that changes as market conditions change.
As supply or demand increases or decreases, a new equilibrium is created for that product.
Changes in Supply
If supply increases, the curve shifts to the ___________.
right
If the supply curve shifts to the right, the market is now in disequilibrium.
1. Did this create a shortage or surplus?
2. What will have to change to bring it back into equilibrium?
Lower the Price
What kind of events cause an increase in supply?
If the supply curve shifts to the left, the market is now in disequilibrium.
1. Did this create a shortage or a surplus?
2. What will have to change to bring it back into equilibrium?
*A drop in costs
Can be due to many factors including:
lower resource prices
new technology for producing is used
subsidies
favorable environment for producing or selling
lower taxes
If supply decreases, the curve shifts to the ___________.
left
What kind of events cause a decrease in supply?
*A rise in costs
Can be due to many factors including:
higher resource prices
smaller number of sellers
unfavorable environment for producing or selling
higher taxes, excise taxes
Changes in Demand
If the demand curve shifts to the right, the market is now in disequilibrium.
1. Did this create a shortage or a surplus?
2. What will have to change to bring it back into equilibrium?
Lower the Price
If the demand curve shifts to the left, the market is now in disequilibrium.
1. Did this create a shortage or a surplus?
2. What will have to change to bring it back into equilibrium?
incomes of buyers are increased
substitutes become more expensive or less available
number of consumers increases (due to population, demographics)
fads, fashions, tastes and attitudes make the good more popular
information about the good (including advertising) increases desire for the good
changes in the buyers' environment (weather, time of year, laws) makes the good more desirable to buyers
buyers have an expectation of higher FUTURE price for the good
What kind of events cause an increase in demand?
What kind of events cause a decrease in demand?
incomes of buyers are decreased
substitutes become less expensive or more available
number of consumers decreases (due to population, demographics)
fads, fashions, tastes and attitudes make the good less popular
information about the good (including advertising) decreases desire for the good
changes in the buyers' environment (weather, time of year, laws) makes the good less desirable to buyers
buyers have an expectation of lower FUTURE price for the good
Surplus
Shortage
Raise the Price
Shortage
Raise the Price
Surplus
Lower the Price
With your partner and whiteboard, tell me:
1. What would the demand curve do?
2. What would the supply curve do?
3. What would happen to the equilibrium price?
D S E
Example:
X
1. The weekly allowance of students who buy pizza at school goes up by $10.

What will happen to Pizza's demand curve, supply curve, and equilibrium price?
2. One of the school cooks quits and the others have more work to do.

What will happen to Pizza's demand curve, supply curve, and equilibrium price?
3. The head cook in the school cafeteria moves and is replaced with a cook who makes awful tasting pizza.

What will happen to Pizza's demand curve, supply curve, and equilibrium price?
4. There is a 25% decrease in the cost of dough.

What will happen to Pizza's demand curve, supply curve, and equilibrium price?
D - stay the same
S - move right
EP - decrease
D - move left
S - stay the same
EP - decrease
D - stay the same
S - move left
EP - increase
D - move right
S - stay the same
EP - increase
A
B
C
D
*The key to the following scenarios is to remember that
TIME
is always held constant. This means that only supply OR demand will be shifting; not both.
*One has not had time to react to the other.
Surpluses cause a firm or market to ________ its prices to restore equilibrium.
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