Chapter 3

Demand, Supply, and Market Equilibrium

Case & Fair: chapter 3

 Outline
• Firms and Households
• The Circular Flow
• Demand
• Supply
• Equilibrium

2
 Demand, Supply, and market equilibrium

 Objective is to start analysing how a market economy

actually works;
 Provide an overview of the way individual markets works;
 Introduce concepts used in both microeconomics and
macroeconomics;
 In large societies, exchanges are more complex (opposite to
the example of Bill and Colleen);
 Understanding the basic forces at work in market systems;
 Understanding behavior and decisions of houselholds and
firms without any central plan or direction (free market)

3
 Firms and Households: The Basic Decision-Making Units
We discuss and analyze the behavior of two fundamental decision – making units:
firms (primary producing units in an economy) and households (the consuming
units in an economy)
What do we understand by a firm?
Firm : An organization that transforms resources (inputs) into products (outputs). Firms
are the primary producing units in a market economy.
o Produce goods, services;
o Some large, many small and some in between;
o Exist to make profit, or not (ex: university)

Who is the entrepreneur?

Entrepreneur: A person who organizes, manages, and assumes the risks of a firm,
taking a new idea or a new product and turning it into a successful business.

Who are households?

Households: The consuming units in an economy. Represent a single person, a

married couple with 4 children, or 15 unrelated people sharing a house.
Even though, they have ride-ranging preferences, but also they have some things in
common.
4
 Input Markets and Output Markets: The Circular Flow

Households and firms interact in two basic kinds of markets: product (or
output) markets and input (or factor) markets.

What is the difference between Input markets and output markets?

 Product or output markets: The markets in which goods and services are
exchanged. Goods and services that are intended for use by households are
exchange on Output markets
Firms Supply, Households demand

 Input or factor markets: The markets in which the resources used to produce
products are exchanged. When a firm decides how much to produce (supply) in
output markets, it must consequently decide how much of each input it needs to
produce the desired level of output.

5
 Input Markets and Output Markets: The Circular Flow
 FIGURE 1 The Circular Flow of Economic Activity

 Diagrams like this one show the circular

flow of economic activity, hence the name
circular flow diagram;

 Flow is the direction which goods and

services flow through input or output
markets;

 Labor services supplied by households

flow to firms, and goods and services
produced by firms flow to households;

 Payment (usually money) flows in the

opposite (counterclockwise) direction:

Payment for goods and services flows

from households to firms, and payment
for labor services flows from firms to
households.

6
  Input Markets and Output Markets: The Circular Flow

Households supply resources on Input markets

They earn income from working, they supply their labor in labor market

What is a labor market?

Labor market : The input/factor market in which households supply work for wages to
firms that demand labor.

Households accumulate their saving and provide them to firms in order to

receive back an interest payment (buying bonds) or a part of the profit (buying
stocks) on the capital market

In capital markets, households supply the funds that firms use to buy capital
goods
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 Input Markets and Output Markets: The Circular Flow
What is a capital market?

Capital market: The input/factor market in which households supply their savings, for
interest or for claims to future profits, to firms that demand funds to buy capital goods.

What also households can do?

They may also supply land or other real property in exchange for rent in the land market

What is a land market?

Land market: The input/factor market in which households supply land or other real
property in exchange for rent.

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 Input Markets and Output Markets: The Circular Flow

Factors of production: The inputs into the production process. Land, labor,
and capital are the three key factors of production.

How Input and Output markets are connected?

Input and output markets are connected through the behavior of both firms and
households.

Firms determine the quantities and character of outputs produced and the
types and quantities of inputs demanded.

Households determine the types and quantities of products demanded and the
quantities and types of inputs supplied.

9
 Demand in Product/Output Markets

A household’s decision about what quantity of a particular output,

or product, to demand depends on a number of factors (mainly
six) , including:

 The price of the product in question First place

 The income available to the household;
 The household’s amount of accumulated wealth;
 The prices of other products available to the household;
 The household’s tastes and preferences;
 The household’s expectations about future income, wealth,
and prices.

10
 Demand in Product/Output Markets

Quantity demanded : The amount (number of units) of a product that a household

would buy in a given period if it could buy all it wanted at the current market price.

If it could by?

The amount that households finally purchase depends on the amount of

product in the actually market,

Sometimes, quantity supplied is not equal to quantity demanded

11
 Demand in Product/Output Markets

Changes in Quantity Demanded versus Changes in Demand

The most powerful relationship in individual markets is between market price

and quantity demanded

By considering the impact of changes in prices on individual demands of a

product, we refer to the device “Ceteris Paribus” (ex: income, other prices,
tastes,… are all constant)

o Changes in the price of a product affect the quantity demanded per

period.
Ex: Thus, we say that an increase in the price of Coca-Cola is likely to
cause a decrease in the quantity of Coca-Cola demanded.
o Changes in any other factor, such as income or preferences, affect
demand.
Ex: We say that an increase in income is likely to cause an increase in the
demand for most goods.
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  Demand in Product/Output Markets

Price and Quantity Demanded: The Law of Demand

Demand schedule: A table showing how much of a given product a household would
be willing to buy at different prices.

Example of Alex
o Mini Cooper : 25 miles 1 gallon gasoline
o From: her house to work (10 miles), her house to her parents’ house (50 miles)
o Price of gasoline : 3$/gallon (go to work every day + visiting her parents once per
week + another 50 miles per week for another activities)

This driving pattern would added up to 250 miles a week

[5 (times/week)x10 (miles) x 2 + 50 (miles to parent’s house) x2 + 50 (miles for other
activities)]
Alex is willing to buy 10 gallons of gasoline

We can see that this demand schedule reflects a lot of information about Alex
including where she lives and works and what she likes to do in her spare time.
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 Demand in Product/Output Markets

Price and Quantity Demanded: The Law of Demand

Suppose that the price of gasoline have changed:

From 3$/ gallon to 5 $/gallon

How does this affect Alex’s demand for gasoline, assuming that everything remains
the same?

Alex decided to take the bus, or share ride with friends. She might visit her parents less
frequently as well

If the price of gasoline fell, Alex might spend more time driving.
All cases could be presented graphically.

That is what is called a demand curve. 14 of 49

TABLE 1 Alex’s Demand Schedule for FIGURE 2 Alex’s Demand Curve
Gasoline
Quantity
Price Demanded
(per gallon) (gallons per week)
$8.00 0
7.00 2
6.00 3
5.00 5
4.00 7
3.00 10
2.00 14
1.00 20
0.00 26

The relationship between price (P) and quantity demanded (q)

presented graphically is called a demand curve.
Demand curves have a negative slope, indicating that lower
prices cause quantity demanded to increase.
Note that Alex’s demand curve is blue; demand in product
markets is determined by household choice.

Copyright © 2017 Pearson Education, Inc. 3-15

1-15
 Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand

Demand Curves Slope Downward

 Demand curve A graph illustrating how much of a given product a household

would be willing to buy at different prices;
 There is a negative or inverse relationship between the quantity demanded and
the price;
 Demand curves always slope downward;
 This negative relationship is often referred as Law of demand;

What is the importance of the demand curve?

It’s a tool that helps us explain economic behavior and predict reactions to
possible price changes.

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  Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand

Demand Curves Slope Downward

 We do not actually draw out our own demand curves for products;
 Analysist can use demand curves to understand the behavior of households in
case of increasing or decreasing in prices;
 Example of Alex

What is the concept of utility? (related to satisfation)

 Economists use this concept to explain the slope of demand curve.
Fact: We consume goods and services, they give us utility or satisfaction.
When, we consume more of a product within time, the additional unit will provide
less satisfaction (Ex: Icecream)

What is the Law of diminishing (decrease, decline) marginal utility?

(utility will decrease)
 Each successive unit of a good is worth less to you;
 You are not going to be willing to pay as much for it;
 It is reasonable to expect a downward slope in the demand curve for that good.
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 Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand

Demand Curves Slope Downward

Law of demand The negative relationship between price and quantity

demanded: As price rises, quantity demanded decreases; as price falls, quantity
demanded increases.

It is reasonable to expect quantity demanded to fall when price rises,

ceteris paribus, and to expect quantity demanded to rise when price
falls, ceteris paribus.

Demand curves have a negative slope.

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 Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand

Other Properties of Demand Curves

Two additional things are notable about Alex’s demand curve.

1) As long as households have limited incomes and wealth, all demand curves will
intersect the price axis (Y Axis)
o For any commodity, there is always a price above which a household will not
or cannot pay. Even if the good or service is very important, all households are
ultimately constrained, or limited, by income and wealth. (Ex of Alex: stops driving
when the price reaches 8 $ per gallon)
o As long as households have limits incomes or wealth, all demand curves will
intersect the price axis.

2) That demand curves intersect the quantity axis (X Axis) is a matter of common
sense. Demand in a given period of time is limited, if only by time, even at a zero
price.
o Ex of Alex: Even at a zero price (gasoline free), there is a limit to how much she
will drive
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 Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand

Other Properties of Demand Curves

 The shape of individual household demand curve (flat, bowed in, bowed out,…)
depends on the unique tastes and preferences of the household and other factors
(as the sensitivity to prices changes, as existing of substitutes,…);

 Thus, to fully understand the shape and the position of demand curves, we must
turn to other determinants of household demand.

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 Demand in Product/Output Markets
Other Determinants of Household Demand
(Income and Wealth, Prices of other goods and services, tastes and preferences, and
expectations)
Income And Wealth

Income: The sum of all a household’s wages, salaries, profits, interest payments,
rents, and other forms of earnings in a given period of time. It is a flow measure
per month, per year,…).
Spending less than the income Saving (amount saved added to your wealth)
Spending more than the income (borrow or using of past savings) Dissaving
(you reduce your wealth)
Wealth or net worth: The total value of what a household owns minus what it
owes. Another word for wealth is net worth, the amount a household would have
left if it sold all of its possessions and paid all of its debts. It is a stock measure.

Normal goods: Goods for which demand goes up when income is higher and for
which demand goes down when income is lower (Ex: movie tickets, restaurant meals,
…) [positive relation with income]
Inferior goods: Goods for which demand tends to fall when income rises
(Ex: Relation in transportation service between bus and airplane)
[negative relation with income]
 Demand in Product/Output Markets
Other Determinants of Household Demand

Prices of Other Goods and Services

Substitutes: Goods that can serve as replacements for one another; when the
price of one increases, demand for the other increases (positive relationship).
Example: For Alex the bus is an alternative that she uses when gasoline gets
expensive.
o In other terms, a fall in the price of a good causes a decline in demand for its
substitutes;
o To be substitutes, two products do not need to be identical

Perfect substitutes: Identical products (Ex: Japanese and American cars)

Complements, complementary goods: Goods that “go together”; or complement

each other. A decrease in the price of one results in an increase in demand for
the other and vice versa (Ex: cars and gasoline,…)

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 Demand in Product/Output Markets
Other Determinants of Household Demand

Tastes and Preferences

o Income, wealth, and prices of goods available are the three factors that determine
the combination of goods and services that a household is able to buy.

o Changes in preferences can and do manifest themselves in market behavior (Ex:

Fitness and increase in demand on sport clothes, sport shoes, smart watches,
sport tools,…)

o Within the constraints of prices and incomes, preference shapes the demand
curve, but it is difficult to generalize about tastes and preferences.

o First, they are volatile (five years ago, more people smoked cigarettes and fewer
people had smartphones)

o Second, tastes are idiosyncratic “unique” (some people prefer dogs, whereas
others are crazy about cats). The diversity of individual demands is almost
unlimited.
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 Demand in Product/Output Markets
Other Determinants of Household Demand

Expectations

o What you decide to buy today certainly depends on today’s prices and your current
income and wealth.

o You also have expectations about what your position will be in the future.

o You may have expectations about future changes in prices too, and these may
affect your decision today
o There are many examples of the ways expectations affect demand (ex1: buying
car or house by borrowing a part of their prices, ex2: student at final year of
medical school and a person with full-time job).

o It is important to understand that demand depends on more than just current

incomes, prices, and tastes.

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 Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve

We know that

Demand curve shows the relationship

between quantity demanded and the
price of a good

Demand curves are constructed while

holding income, tastes, and other
prices constant.

But, if income, tastes, or other prices change, we would have to derive an entirely
new relationship between price and quantity demanded.

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 Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
Back to Alex example
-Situation 1: Suppose that the salary was 500 $/week, price of 3 $/gallon of
gasoline and she derives 250 miles/week

Total weekly expenses = 3 x10 = 30 $ [represents 6% (30/500) of her income]

-Situation 2: Suppose that the salary has increased to 700 $/week

Alex is supposed to raise the amount of gasoline regardless what she was using
before

Let us observed the new situation

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 Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
Schedule D0 Schedule D1
Quantity Demanded Quantity Demanded Figure 3. Shit of a
Demand Curve following a rise in
Price (Gallons per Week at an Income
(Gallons per Week at an
Income of
Income of $700 per Week)
(per Gallon) $500 per Week)

$8.00 0 3
7.00 2 5
6.00 3 7
5.00 5 10
4.00 7 12
3.00 10 15
2.00 14 19
1.00 20 24
0.00 26 30

When the price of a good changes, we move

along the demand curve for that good.

When any other factor that influences demand

changes (income, tastes, and so on), the
relationship
between price and quantity is different; there is a
shift of the demand curve, in this case from D0 to D1.
Gasoline is a normal good so an income increase
shifts the curve to the right .
27 of 49
 Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
Shift of a demand curve: The change that takes place in a demand curve
corresponding to a new relationship between quantity demanded of a good and price
of that good. The shift is brought about by a change in the original conditions.

It is important to distinguish between a change in quantity demanded

(movement along a demand curve)- and a shift of demand.

Change in price of a good or service leads to

Change in quantity demanded (movement along the demand curve).
Change in income, preferences, or prices of other goods or services leads to
Change in demand (shift of the demand curve).

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 Demand in Product/Output Markets

Shift of Demand versus Movement Along a Demand Curve

Difference in the impact of increasing in income on demand curve between
inferior and normal goods
Figure 4. Shits versus movement along a demand curve

When income increases, the demand for inferior goods shifts to the left and the demand for normal
goods shifts to the right.

29
 Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
Impact of increasing in prices on substitute and complement goods

b. If the price of hamburger rises (from 1.49 $ to 3.09 $), the quantity of hamburger demanded
declines (from 10 to 5 pounds per month)— his is a movement along the demand curve.

But, household buys more chicken demand for chicken rises (a substitute for hamburger)
The same price rise for hamburger would shift the demand for chicken (a substitute for
hamburger) to the right. At the same time, the demand for ketchup (a complement to
hamburger) to the left.
 Demand in Product/Output Markets
From Household Demand To Market Demand

Market demand: The sum of all the quantities of a good or service demanded per
period by all the households buying in the market for that good or service.

Figure 5 shows the derivation of a market demand curve from three individual
demand curves

In reality, most markets have thousands or even millions of demanders

31
Demand in Product/Output Markets
From Household Demand To Market Demand

 FIGURE 3.5 Deriving Market Demand

from Individual Demand Curves
Total demand in the marketplace is simply the sum
of the demands of all the households shopping in a
particular market. It is the sum of all the individual
demand curves—that is, the sum of all the
individual quantities demanded at each price.
32
 Demand in Product/Output Markets

From Household Demand To Market Demand

A market demand curve shows the total amount of a product that would be sold
at each price if households could buy all they wanted at that price.

As general rule:
Q quantity related to the entire market
q quantity demanded by individual households

33 of 49
 Supply in Product/Output Markets

o Now, we turn to the other half of the market: How can we understand the behavior of
firms selling goods and services? What determines their willingness to sell a good or
service?

We refer to this as the supply side of the market

o Normally, firms build factories, hire workers, and buy raw materials because they
believe that they can sell their products for more than it cost to produce them.

o Firms supply goods and services because they believe it will be profitable to do so.

o Supply decisions thus

depend on potential profit.
This means that supply is likely to react to
o Profit: The difference changes in revenues and changes in production
between revenues and costs. costs.

34
 Supply in Product/Output Markets

Price and Quantity Supplied: The Law of Supply

Quantity supplied: The amount of a particular product that a firm would be willing
and able to offer for sale at a particular price during a given time period.

Supply schedule: A table showing how much of a product firms will sell at different
prices (or alternative prices).

Law of supply: The positive relationship between price and quantity of a good
supplied: An increase in market price will lead to an increase in quantity supplied,
and a decrease in market price will lead to a decrease in quantity supplied.

Supply curve: A graph illustrating how much of a product a firm will sell at different
prices.
o The information in a a supply schedule may be presented graphically in a supply
curve.
o Supply curves slope upward. The upward or positive slope reflects the positive
relation between price and quantity supplied.
o Note that, we can assist to certain cases, where price rises but quantity supplied
no longer increases.
35
 Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply

Example: Suppose that we have an individual farmer Clarence Brown, who

sell soy-beans at various prices.

o If the market paid 1.50 $ or less for a bushel for soybeans, Brown would not
supply any soybeans (because 1.50 $ will not compensate costs of growing
soybeans, including the opportunity cost of his time and land)

o And, so on …

o We can assume that in the longer run, Brown may acquire more land or
technology may change, allowing for more soybean production.

o Note that terms short run and long run have precise meanings in economics.
Time plays a critical role in supply decisions.

o When prices changes, firms’ immediate response may be different from what
they are able to do after a month or a year. Short-run and long-run supply
curves are often different 36
 Supply in Product/Output Markets

Price and Quantity Supplied: The Law of Supply

TABLE 3.3 Clarence Brown’s Supply  FIGURE 6 Clarence Brown’s Individual

Schedule for Soybeans Supply Curve

Quantity Supplied
Price (Per Bushel) (Bushels Per Year)
$1.50 0
1.75 10,000
2.25 20,000
3.00 30,000
4.00 45,000
5.00 45,000

A producer will supply more when the price of output

is higher.

The slope of a supply curve is positive. Note that the

supply curve is red: Supply is determined by choices
made by firms.

37
 Supply in Product/Output Markets
Other Determinants Of Supply

The Cost Of Production

o In order for a firm to make a profit, its revenue must exceed its costs.

o Example of farmer Brown, he thinks about how much to supply at a particular

price. He will be looking for his costs.

o Brown supply decision is likely to change in response to changes in the cost of

production.

o Cost of production depends on a number of factors, including the available

technologies and the prices and quantities of the inputs needed by the firm
(labor, land, capital, energy, and so on).

o Technological change can have an enormous impact on the cost of production

over time

38
 Supply in Product/Output Markets

Other Determinants Of Supply

The Prices of Related Products

o Firms often react to changes in the prices of related products;

o For example, if land can be used for either corn or soybean production, an
increase in soy-bean prices may cause individual farmers to shift acreage out of
corn production into soybeans.

o An increase in soybean prices actually affects the amount of corn applied

Assuming that its objective is to maximize profits, a firm’s decision about what
quantity of output, or product, to supply depends on:
1. The price of the good or service.
2. The cost of producing the product, which in turn depends on:
■ The price of required inputs (labor, capital, and land).
■ The technologies that can be used to produce the product.
3. The prices of related products.
39
 Supply in Product/Output Markets
Shift of Supply versus Movement Along a Supply Curve

Movement along a supply curve: The change in quantity supplied brought about
by a change in price, ceteris paribus

But, since supply decisions are also influenced by factors other than price, a
new relationship between price and quantity supplied come about when
factors other than price change

Shift of a supply curve: The change that takes place in a supply curve
corresponding to a new relationship between quantity supplied of a good and the
price of that good. The shift is brought about by a change in the original
conditions.

40
 Supply in Product/Output Markets
Shift of Supply versus Movement Along a Supply Curve
TABLE 3.4 Shift of Supply Schedule for Soybeans  FIGURE 7 Shift of the Supply Curve or Soybeans
Following Development of a New Following Development of a New Seed Strain
Disease-Resistant Seed Strain

SCHEDULE D0 SCHEDULE D1
Quantity Supplied Quantity Supplied
Price (Bushels per Year (Bushels per Year
(per Bushel) Using Old Seed) Using New Seed)
$1.50 0 5,000
1.75 10,000 23,000
2.25 20,000 33,000
3.00 30,000 40,000
4.00 45,000 54,000
5.00 45,000 54,000

When the price of a product changes, we move

along the supply curve for that product; the
quantity supplied rises or falls.

When any other factor affecting supply changes,

the supply curve shifts.
41
 Supply in Product/Output Markets

Shift of Supply versus Movement Along a Supply Curve

As with demand, it is very important to distinguish between movements along

supply curves (changes in quantity supplied) and shifts in supply curves
(changes in supply):

Change in price of a good or service leads to

Change in quantity supplied (movement along a supply curve).
Change in income, preferences, or prices of other goods or services leads to
Change in supply (shift of a supply curve).

42
 Supply in Product/Output Markets

From Individual Supply to Market Supply

Market supply: The sum of all that is supplied each period by all producers of a
single product.

43
 Supply in Product/Output Markets
From Individual Supply to Market Supply

 FIGURE 3.8 Deriving Market Supply

from Individual Firm Supply Curves
Total supply in the marketplace is the sum of all
the amounts supplied by all the firms selling in
the market. It is the sum of all the individual
quantities supplied at each price.
44
 Market Equilibrium
o We will see how supply and demand in the market interact to determine the final
market price.

o Before, we have separated households decisions about how much to demand

from firm decisions about how much to supply.

o By now, we will see that the operation of the market, however, clearly depends on
the interaction between suppliers and demanders.

o At any moment, one of the three conditions prevails in every market:

The quantity supplied

The quantity demanded
The quantity supplied equalss the quantity
exceeds the quantity
exceeds the quantity demanded at the current
supplied at the current
demanded at the current price (Equilibrium)
price (Excess demand)
price (Excess supply)

45
 Market Equilibrium

Equilibrium: The condition that exists when quantity supplied and

quantity demanded are equal. At equilibrium, there is no tendency for
price to change.

Excess Demand

Excess demand or shortage: The condition that exists when quantity

demanded exceeds quantity supplied at the current price.

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 Market Equilibrium
Excess Demand
 FIGURE 9 Excess Demand, or Shortage

At a price of $1.75 per bushel, quantity

demanded (50 000 bushels) exceeds
quantity supplied (25 000 bushels).

When excess demand exists, there is a

tendency for price to rise, as
demanders compete against each other
for the limited supply.

Price rises until quantity demanded and

quantity supplied are equal.

When quantity demanded equals

quantity supplied, excess demand is
eliminated and the market is in
equilibrium. Here the equilibrium price
is $2.50 and the equilibrium quantity is
35,000 bushels.
When quantity demanded exceeds quantity supplied, price tends to rise.
When the price in a market rises, quantity demanded falls and quantity supplied
rises until an equilibrium is reached at which quantity demanded and quantity
supplied are equal. 47
 Market Equilibrium
Excess Supply  FIGURE 10 Excess Supply, or Surplus
Excess supply or surplus: The
condition that exists when quantity
supplied exceeds quantity
demanded at the current price.
At a price of $3.00, quantity supplied
(40 000 Bushels) exceeds quantity
demanded (20 000 Bushels) by
20 000 bushels.

This excess supply will cause the

price to fall from 3 $ to 2.50 $.
The quantity supplied decreases from
40 000 Bushels to 35 000 Bushels per
year.
The lower price causes quantity
demanded to rise from 20 000 Bushels
to 35 000 Bushels .
At 2.5 $, quantity demanded and
quantity supplied are equal.
When quantity supplied exceeds quantity demanded at the current price, the
price tends to fall. When price falls, quantity supplied is likely to decrease and
quantity demanded is likely to increase until an equilibrium price is reached
where quantity supplied and quantity demanded are equal. 48
 Market Equilibrium
Changes In Equilibrium Before the freeze, the coffee market
When supply and demand curves shift, the was in equilibrium at a price of $1.20
equilibrium price and quantity change. per pound.
The following example will help to illustrate this
point and show us how equilibrium is restored in At that price, quantity demanded
markets in which either demand and supply equaled quantity supplied.
changes.
FIGURE 11 The Coffee Market: A Shift of Supply and A major freeze hit Brazil and Colombia.
Subsequent Price Adjustment
The supply of coffee beans decreased.
The supply curve shifted to the left
(from S0 to S1), increasing the
equilibrium price to $2.40.

At the price of 1.20 $, quantity

demanded (13.2 billion pounds) is
greater than quantity supplied (6.6
billion pounds).

When excess demand exists in a

market, price can be expected to rise.
So the price rises to a new equilibrium
at 2.40 $.
Quantity demanded = quantity
supplied for 9.9 billions pounds
49
 Market Equilibrium  FIGURE 12 Examples of Supply and
Demand Shifts for Product X
Changes In Equilibrium

50