ECONOMICS TOPIC 3 LESSON 8

ECONOMICS TOPIC 3 LESSON 8

CHANGES IN MARKET EQUILIBRIUM

ESSENTIAL QUESTION

How do we affect the economy?

Tending Toward Equilibrium

Economists say that a market will tend toward equilibrium, which means that the price and quantity will gradually move toward their equilibrium levels. 

Multiple Choice

Check Understanding What might cause orders for microwave ovens to increase and the availability of microwave ovens to decrease?

• falling prices

• rising prices

• fluctuating prices

• stable prices

Increasing Supply

different non-price determinants that can shift a supply curve to the left or to the right—that is, decrease or increase supply of a good or service in the marketplace. These factors include advances in technology, new government taxes and subsidies, and changes in the prices of the raw materials and labor used to produce the good or service.

Market Changes

Gradually, improved technology for producing digital cameras caused prices to fall. 

Advances in technology have lowered the cost of manufacturing digital cameras by reducing some of the input costs, such as computer chips. Advances in production have allowed manufacturers to produce digital cameras at lower costs. These lower costs have been passed on to consumers in the form of lower prices.

Open Ended

As digital cameras became cheaper and easier to produce, the supply increased. Draw Conclusions Why do you think the pace of the falling prices began to slow in 2004?

Finding a New Equilibrium

Digital cameras evolved from an expensive luxury good to a midrange good when a new generation of computer chips reduced the cost of production. These lower costs shifted the supply curve to the right, where, at each price, producers are willing to supply a larger quantity.

A graph can show you how the shifts in supply threw the market into disequilibrium. 

Changing Equilibrium

In real-life markets, equilibrium is usually not an unchanging, single point on a graph. The equilibrium in the digital camera market has always been in motion. The market equilibrium follows the intersection of the demand curve and the supply curve as that point moves downward along the demand curve.

Multiple Choice

Recall What caused the supply curve for digital cameras to keep moving to the right during the early 2000s?

• Falling transportation costs made them cheaper to supply.

• Improved technology made them cheaper to produce.

• Higher taxes made them more expensive for consumers.

• Increased inventories made them more expensive for sellers.

Decreasing Supply

When the supply curve shifts to the left, the equilibrium price and quantity sold will change as well. This process is the exact opposite of the change that results from an increase in supply. As the supply curve shifts to the left, suppliers raise their prices, and the quantity demanded falls. The new equilibrium point will be at a spot along the demand curve above and to the left of the original equilibrium point. The market price is higher than before, and the quantity sold is lower.

Multiple Choice

Recall What caused the supply curve for digital cameras to keep moving to the right during the early 2000s?

• Falling transportation costs made them cheaper to supply.

• Improved technology made them cheaper to produce.

• Higher taxes made them more expensive for consumers.

• Increased inventories made them more expensive for sellers.

Increasing Demand

You know that fads reflect the impact of consumer tastes and advertising on consumer behavior. Fads like these, in which demand rises quickly, are real-life examples of a rapid, rightward shift in a market demand curve. Figure 3.24

Shortages

the shortage appears as empty shelves or long lines. Shortage also appears in the form of search costs—the financial and opportunity costs that consumers pay in searching for a product or service. 

Open Ended

The supply of art from this painter is severely limited. Express Problems Clearly Assuming significant demand, what effect would the limited supply have on the price for this art?

Return to Equilibrium

In time, firms will react to the signs of shortage by increasing their prices and the quantity supplied. 

Multiple Choice

Generate Explanations Which of the following explains why a firm’s decision to raise prices during a shortage helps lead to a return to equilibrium?

• Higher prices lead to a surplus of goods.

• Higher prices keep the shortage from ending.

• Higher prices decrease the quantity demanded.

• Higher prices help maintain the firm’s inventory.

Decreasing Demand

As demand falls, the demand curve shifts to the left. Suppliers will respond to decreased demand for the once-fashionable toy by cutting prices on their inventory. 

Open Ended

This is one of a shrinking number of consumers of old-fashioned photography supplies. Identify Cause and Effect What should be happening to the price of these products?

Multiple Choice

Recall Why has the demand curve for CDs shifted to the left in recent years?

• The supply of CDs has increased.

• New technology has caused demand to fall.

• Higher taxes have caused supply to decrease.

• The quality of sound produced by CDs is poor.

Open Ended

How do we affect the economy?