Chapter 2: The Market Forces of Supply and Demand PDF

Chapter 2 Wojciech Gerson (1831-1901) The Market Forces of Supply and...

Chapter 2 Wojciech Gerson (1831-1901) The Market Forces of Supply and Demand © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Price of Corn in the US, 2000-2018  Why do prices vary so much?  Changes in supply and demand conditions affects pattern of prices © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 2 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  In this chapter, look for the answers to these questions What factors affect buyers’ demand for goods? What factors affect sellers’ supply of goods? How do supply and demand determine the price of a good and the quantity sold? How do changes in the factors that affect demand or supply affect the market price and quantity of a good? © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  A consumer’s decision about what quantity of a particular good to demand depends on a number of factors including: The price of the good The income of the consumer The wealth of the consumer The prices of other related goods The consumer’s tastes and preferences The consumer’s future expectations © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 4 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand  The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.  Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal.  qd = f(p,i,w,po,t,e) © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 5 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Demand Schedule Quantity of  Demand schedule: Price of Ice cream Ice cream a table that shows the demanded relationship between the $0.00 16 price of a good and the 1.00 14 quantity demanded 2.00 12 3.00 10  Example: 4.00 8 Robbin’s demand for Ice 5.00 6 creams. 6.00 4  Notice that Robbin’s preferences obey the law of demand. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 6 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Robbin’s Demand Schedule & Curve Price of Quantity Price of lcs Ice of lcs demanded $6.00 creams $0.00 16 $5.00 1.00 14 $4.00 2.00 12 3.00 10 $3.00 4.00 8 $2.00 5.00 6 $1.00 6.00 4 $0.00 Quantity 0 5 10 15 of Ice © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as creams 7 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Market Demand versus Individual Demand  The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.  Suppose Robbin and Ken are the only two buyers in the Ice cream market. (Qd = quantity demanded) Price Robbin’s Qd Ken’s Qd Market Qd $0.00 16 + 8 = 24 1.00 14 + 7 = 21 2.00 12 + 6 = 18 3.00 10 + 5 = 15 4.00 8 + 4 = 12 5.00 6 + 3 = 9 6.00 4 + 2 = 6  The Market Demand Curve for Ice creams Qd P P (Market) $6.00 $0.00 24 $5.00 1.00 21 2.00 18 $4.00 3.00 15 $3.00 4.00 12 $2.00 5.00 9 $1.00 6.00 6 $0.00 Q 0 5 10 15 20 25 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 9 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 10 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters  The demand curve shows how price affects quantity demanded, other things being equal.  These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price).  Changes in them shift the D curve… © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 11 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters: Income  Demand for a normal good is positively related to income.  Increase in income causes increase in quantity demanded at each price, shifts D curve to the right. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 12 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters: Income P Suppose the income of $6.00 consumers increase. $5.00 Then, at each P, Qd will increase $4.00 (by 5 in this example). $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 13 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters: Prices of Related Goods  Two goods are substitutes if an increase in the price of one causes an increase in demand for the other.  Example: Mountain Dew and Sprite. An increase in the price of Mountain Dew increases demand for Sprite, shifting Sprite demand curve to the right.  Other examples: Coke and Pepsi, Dell and HP computers, Realme and Redmi phones © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 14 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters: Prices of Related Goods  Two goods are complements if an increase in the price of one causes a fall in demand for the other.  Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.  Other examples: cars and petrol, Laptops and Laptop Bags, cricket bats and balls. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 15 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters: Tastes  Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.  Example: The gym became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 16 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Demand Curve Shifters: Expectations  Expectations affect consumers’ buying decisions.  Examples:  If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now.  If the economy sours and people worry about their future job security, demand may fall now. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 17 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary: Variables That Influence Buyers Variable A change in this variable… Price …causes a movement along the D curve # of buyers …shifts the D curve Income …shifts the D curve Price of related goods …shifts the D curve Tastes …shifts the D curve Expectations …shifts the D curve © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 18 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Demand curve Draw a demand curve for Pepsi. What happens to it in each of the following scenarios? A. The price of coke falls B. The price of Pepsi falls C. The price of Biryani falls ©Enyezdi/Shutterstock.com  A. Price of coke falls Price of Pepsi and Pepsi coke are substitutes. A fall in price of coke P1 shifts demand for Pepsi downloads to the left. D2 D1 Q2 Q1 Quantity of Pepsi demanded © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  B. Price of Pepsi falls Price of Pepsi The D curve does not shift. Move down along P1 curve to a point with lower P, higher Q. P2 D1 Q1 Q2 Quantity of Pepsi demanded © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  C. Price of Biryani falls Pepsi and Biryani Price of are complements. Pepsi A fall in price of Biryani shifts the demand curve for P1 Pepsi upwards to the right. D1 D2 Q1 Q2 Quantity of Pepsi demanded © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Determinants of quantity demanded response to price The quantity demanded response to price depends on:  the extent to which close substitutes are available  whether the good is a necessity or a luxury  the time horizon—response is higher in the long run than the short run © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 23 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply  The quantity supplied of any good is the amount that sellers are willing and able to sell.  Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 24 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The Supply Schedule Quantity  Supply schedule: Price of Ice of Ice A table that shows the creams creams relationship between the supplied price of a good and the $0.00 0 quantity supplied. 1.00 3 2.00 6  Example: 3.00 9 Amul’s supply of lce creams. 4.00 12 5.00 15  Notice that Amul’s supply 6.00 18 schedule obeys the law of supply. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 25 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Amul’s Supply Schedule & Curve Quantity Price of Ics P of lcs supplied $6.00 $0.00 0 $5.00 1.00 3 $4.00 2.00 6 3.00 9 $3.00 4.00 12 $2.00 5.00 15 $1.00 6.00 18 $0.00 Q 0 5 10 15 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 26 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Market Supply versus Individual Supply  The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.  Amul and Mother Dairy are the only two sellers in this market. (Qs = quantity supplied) Price Amul MD Market Qs $0.00 0 + 0 = 0 1.00 3 + 2 = 5 2.00 6 + 4 = 10 3.00 9 + 6 = 15 4.00 12 + 8 = 20 5.00 15 + 10 = 25 6.00 18 + 12 = 30  The Market Supply Curve QS P (Market) P $6.00 $0.00 0 1.00 5 $5.00 2.00 10 $4.00 3.00 15 $3.00 4.00 20 $2.00 5.00 25 6.00 30 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 28 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply Curve Shifters  The supply curve shows how price affects quantity supplied, other things being equal.  These “other things” are non-price determinants of supply.  Changes in them shift the S curve… © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 29 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply Curve Shifters: Input Prices  Examples of input prices: wages, prices of raw materials.  A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 30 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply Curve Shifters: Input Prices P Suppose the $6.00 price of milk falls. $5.00 At each price, $4.00 the quantity of lcs supplied $3.00 will increase $2.00 (by 5 in this example). $1.00 Q $0.00 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 31 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply Curve Shifters: Technology  Technology determines how much inputs are required to produce a unit of output.  A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 32 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply Curve Shifters: # of Sellers  An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 33 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply Curve Shifters: Expectations  Example:  Events in the Middle East lead to expectations of higher oil prices.  In response, ONGC reduces supply now, save some inventory to sell later at the higher price.  S curve shifts left.  In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable) © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 34 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary: Variables that Influence Sellers Variable A change in this variable… Price …causes a movement along the S curve Input Prices …shifts the S curve Technology …shifts the S curve # of Sellers …shifts the S curve Expectations …shifts the S curve © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 35 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Supply and Demand Together P $6.00 D S Equilibrium: P has reached $5.00 the level where $4.00 quantity supplied $3.00 equals quantity demanded $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 36 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Equilibrium price: the price that equates quantity supplied with quantity demanded P $6.00 D S P QD QS $5.00 $0 24 0 $4.00 1 21 5 2 18 10 $3.00 3 15 15 $2.00 4 12 20 $1.00 5 9 25 $0.00 6 6 30 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 37 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Equilibrium quantity: the quantity supplied and demanded at the equilibrium price P $6.00 D S P QD QS $5.00 $0 24 0 $4.00 1 21 5 2 18 10 $3.00 3 15 15 $2.00 4 12 20 $1.00 5 9 25 $0.00 6 6 30 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 38 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P Example: $6.00 D Surplus S If P = $5, $5.00 then $4.00 QD = 9 lcs $3.00 and QS = 25 lcs $2.00 resulting in a $1.00 surplus of 16 lcs $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 39 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P $6.00 D Surplus S Facing a surplus, sellers try to increase $5.00 sales by cutting price. $4.00 This causes $3.00 QD to rise and QS to fall… $2.00 …which reduces the surplus. $1.00 $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 40 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded P $6.00 D Surplus S Facing a surplus, sellers try to increase $5.00 sales by cutting price. $4.00 This causes $3.00 QD to rise and QS to fall. $2.00 Prices continue to fall until market reaches $1.00 equilibrium. $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 41 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P $6.00 D S Example: If P = $1, $5.00 then $4.00 QD = 21 lcs $3.00 and QS = 5 lcs $2.00 resulting in a $1.00 shortage of 16 lcs $0.00 Shortage Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 42 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P $6.00 D S Facing a shortage, sellers raise the price, $5.00 causing QD to fall $4.00 and QS to rise, $3.00 …which reduces the $2.00 shortage. $1.00 Shortage $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 43 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied P $6.00 D S Facing a shortage, sellers raise the price, $5.00 causing QD to fall $4.00 and QS to rise. $3.00 Prices continue to rise $2.00 until market reaches equilibrium. $1.00 Shortage $0.00 Q 0 5 10 15 20 25 30 35 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 44 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Three Steps to Analyzing Changes in Eq’m To determine the effects of any event, 1. Decide whether the event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply—demand diagram to see how the shift changes eq’m P and Q. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 45 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE: The Market for Electric Cars P price of S1 electric cars P1 D1 Q Q1 quantity of electric cars © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 46 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 1: A Shift in Demand EVENT TO BE ANALYZED: P Increase in price of S1 petrol. STEP 1: P2 D curve shifts because STEP 2: price of gas P1 affects demand for D shifts right hybrids. because STEP 3: high gas S curve price doeshybrids makes not D1 D2 The shift shift, causes because an price more attractive Q increase of gas in price does not cars. Q1 Q2 relative to other and quantity affect cost of of electric cars. producing hybrids. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 47 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 1: A Shift in Demand Notice: P When P rises, S1 producers supply a larger quantity P2 of hybrids, even though the S curve P1 has not shifted. Always be careful D2 D1 to distinguish b/w a shift in a curve and Q Q1 Q2 a movement along the curve. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 48 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Terms for Shift vs. Movement Along Curve  Change in supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)  Change in the quantity supplied: a movement along a fixed S curve occurs when P changes  Change in demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)  Change in the quantity demanded: a movement along a fixed D curve occurs when P changes © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 49 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 2: A Shift in Supply EVENT: New technology reduces cost of P producing electric cars. S1 S2 STEP 1: S curve shifts because STEP 2: event affects P1 cost of production. S shifts right P2 D curve does because event not STEPbecause shift, 3: reduces cost, D1 The shift causes production technology makes production Q price is not to onefallof the Q1 Q2 more profitable at and quantity factors that to rise. affect any given price. demand. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 50 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 3: A Shift in Both Supply EVENTS: and Demand Price of gas rises AND P new technology reduces S1 S2 production costs STEP 1: P2 Both curves shift. P1 STEP 2: Both shift to the right. STEP 3: D1 D2 Q rises, but effect Q on P is ambiguous: Q1 Q2 If demand increases more than supply, P rises. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 51 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  EXAMPLE 3: A Shift in Both Supply EVENTS: and Demand price of gas rises AND P new technology reduces S1 S2 production costs STEP 3, cont. P1 But if supply increases more P2 than demand, D1 D2 P falls. Q Q1 Q2 © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 52 permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary A competitive market has many buyers and sellers, each of whom has little or no influence on the market price. Economists use the supply and demand model to analyze competitive markets. The downward-sloping demand curve reflects the law of demand, which states that the quantity buyers demand of a good depends negatively on the good’s price. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary Besides price, demand depends on buyers’ incomes, tastes, expectations, the prices of substitutes and complements, and number of buyers. If one of these factors changes, the D curve shifts. The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers supply depends positively on the good’s price. Other determinants of supply include input prices, technology, expectations, and the # of sellers. Changes in these factors shift the S curve. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary The intersection of S and D curves determines the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded. If the market price is above equilibrium, a surplus results, which causes the price to fall. If the market price is below equilibrium, a shortage results, causing the price to rise. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Summary We can use the supply-demand diagram to analyze the effects of any event on a market: First, determine whether the event shifts one or both curves. Second, determine the direction of the shifts. Third, compare the new equilibrium to the initial one. In market economies, prices are the signals that guide economic decisions and allocate scarce resources. © 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.