ECONOMICS​ ​12

2.3​ ​-​ ​price

Price

The​ ​discussion​ ​including​ ​price​ ​has,​ ​thus​ ​far​ ​in​ ​the​ ​course,​ ​been
incomplete.​ ​ ​Prices​ ​of​ ​goods​ ​and​ ​services​ ​do​ ​not​ ​just​ ​‘happen’​ ​in​ ​the
market,​ ​neither​ ​from​ ​consumers​ ​choosing​ ​a​ ​price​ ​they’d​ ​pay,​ ​nor​ ​from
firms​ ​choosing​ ​a​ ​price​ ​at​ ​which​ ​they’d​ ​sell.​ ​ ​Instead,​ ​prices​ ​come​ ​about
as​ ​the​ ​result​ ​of​ ​certain​ ​interactions.​ ​ ​The​ ​key​ ​interactions​ ​that
determine​ ​price,​ ​are​ ​the​ ​interactions​ ​between​ ​the​ ​demand​ ​and​ ​supply
curves.

This​ ​section​ ​will​ ​introduce​ ​just​ ​how​ ​the​ ​demand​ ​and​ ​supply​ ​model​ ​can
be​ ​used​ ​to​ ​explain​ ​how​ ​both​ ​price​ ​and​ ​quantity​ ​of​ ​goods​ ​and​ ​services
are​ ​determined.

Market​ ​Equilibrium

When​ ​examining​ ​a​ ​graph​ ​containing​ ​both​ ​D​ ​and​ ​S​ ​curves,​ ​one​ ​will market​ ​equilibrium​...is​ ​the
notice​ ​immediately​ ​that​ ​the​ ​D​ ​and​ ​S​ ​curves​ ​intersect.​ ​ ​They​ ​intersect point​ ​at​ ​which​ ​D​ ​and​ ​S
because​ ​they​ ​have​ ​opposite​ ​slopes.​ ​ ​The​ ​point​ ​at​ ​which​ ​they​ ​intersect​ ​is curves​ ​intersect...the​ ​point
where​ ​D​ ​=​ ​S
called​ ​the​ ​market​ ​equilibrium​.​ ​ ​The​ ​equilibrium​ ​price​​ ​is​ ​the​ ​P​ ​at​ ​which
D​ ​exactly​ ​equals​ ​S​ ​(price​ ​P1​ ​on​ ​diagram​ ​below);​ ​while​ ​the​ ​equilibrium equilibrium​ ​price​...is​ ​the​ ​P
quantity​​ ​is​ ​the​ ​Q​ ​at​ ​which​ ​D​ ​exactly​ ​equals​ ​S​ ​(quantity​ ​Q1​ ​on​ ​diagram at​ ​market​ ​equilibrium,
below).​ ​ ​The​ ​equilibrium​ ​P​ ​is​ ​the​ ​ideal​ ​P​ ​from​ ​both​ ​the​ ​buyers’​ ​and​ ​the where​ ​D​ ​=​ ​S
sellers’​ ​perspective.​ ​ ​Also,​ ​the​ ​equilibrium​ ​Q​ ​is​ ​the​ ​quantity​ ​at​ ​which equilibrium​ ​quantity​...is​ ​the
exactly​ ​the​ ​right​ ​amount​ ​of​ ​units​ ​are​ ​supplied/produced,​ ​and​ ​they​ ​are Q​ ​at​ ​market​ ​equilibrium,
all​ ​purchased​ ​by​ ​consumers,​ ​without​ ​any​ ​consumers​ ​left​ ​wanting. where​ ​D​ ​=​ ​S

KSS​ ​-​ ​Kletke​ ​-​ ​ECON​ ​12 2.3​ ​ ​--​ ​ ​Page​ ​1

 Changes​ ​to​ ​Demand​ ​&​ ​Supply​ ​-​ ​A​ ​Review

Demand​ ​and​ ​supply​ ​change​ ​almost​ ​constantly.​ ​ ​Demand​ ​changes variables​ ​of
demand​...things​ ​that​ ​cause
because​ ​of​ ​the​ ​influence​ ​of​ ​the​ ​following​ ​six​ ​variables​ ​of​ ​demand​:
demand​ ​to​ ​change,​ ​such​ ​as:
● price​ ​of​ ​the​ ​product​ ​itself
● price​ ​of​ ​the​ ​product
● consumer​ ​income
● consumer​ ​income
● prices​ ​of​ ​related​ ​goods ● prices​ ​of​ ​related​ ​goods
● consumer​ ​tastes ● consumer​ ​tastes
● consumer​ ​expectations ● consumer​ ​expectations
● the​ ​number​ ​of​ ​buyers​ ​in​ ​the​ ​market ● number​ ​of​ ​buyers​ ​in​ ​the
market
Supply,​ ​on​ ​the​ ​other​ ​hand,​ ​changes​ ​because​ ​of​ ​the​ ​influence​ ​of​ ​the
following​ ​six​ ​variables​ ​of​ ​supply​: variables​ ​of​ ​supply​...things
● price​ ​of​ ​the​ ​product​ ​itself that​ ​cause​ ​supply​ ​to​ ​change,
● cost​ ​of​ ​production​ ​inputs such​ ​as:
● changes​ ​in​ ​technology ● price​ ​of​ ​the​ ​product
● cost​ ​of​ ​production
● prices​ ​of​ ​other​ ​products​ ​produced​ ​by​ ​firm
inputs
● number​ ​of​ ​suppliers​ ​in​ ​the​ ​market
● changes​ ​in​ ​technology
● expected​ ​future​ ​prices​ ​of​ ​the​ ​product
● prices​ ​of​ ​other
products​ ​produced​ ​by
Most​ ​of​ ​the​ ​above​ ​variables​ ​(except​ ​for​ ​the​ ​price​ ​of​ ​the​ ​product)​ ​result the​ ​firm
in​ ​a​ ​shift/movement​ ​of​ ​either​ ​the​ ​D​ ​or​ ​S​ ​curve.​ ​ ​Shifts​ ​such​ ​as​ ​these ● number​ ​of​ ​suppliers​ ​in
would​ ​cause​ ​changes​ ​in​ ​either/both​ ​P​ ​and​ ​Q.​ ​ ​The​ ​next​ ​section​ ​presents the​ ​market
some​ ​examples​ ​of​ ​how​ ​P​ ​and​ ​Q​ ​are​ ​affected​ ​by​ ​shifts​ ​in​ ​D​ ​and​ ​S​ ​curves. ● expected​ ​future​ ​prices
of​ ​the​ ​product
Examples​ ​of​ ​Changes​ ​to​ ​Demand​ ​&​ ​Supply

Example​ ​1:​ ​ ​a​ ​change​ ​in​ ​D;​ ​no​ ​change​ ​to​ ​S

D​ ​goes​ ​up,​ ​S​ ​stays​ ​the

same...both​ ​P​ ​and​ ​Q​ ​go​ ​up

D​ ​goes​ ​down,​ ​S​ ​stays​ ​the

same...both​ ​P​ ​and​ ​Q​ ​go
down

KSS​ ​-​ ​Kletke​ ​-​ ​ECON​ ​12 2.3​ ​ ​--​ ​ ​Page​ ​2

 Example​ ​2:​ ​ ​a​ ​change​ ​in​ ​S;​ ​no​ ​change​ ​to​ ​D

S​ ​goes​ ​down,​ ​D​ ​stays​ ​the

same...P​ ​goes​ ​up,​ ​Q​ ​goes
down

S​ ​goes​ ​up,​ ​D​ ​stays​ ​the

same...P​ ​goes​ ​down,​ ​Q​ ​goes
up

Example​ ​3:​ ​ ​when​ ​both​ ​D​ ​&​ ​S​ ​change,​ ​and​ ​D​ ​changes​ ​more​ ​than​ ​S

both​ ​D​ ​and​ ​S​ ​increase,​ ​but​ ​D

increases​ ​more...both​ ​P​ ​and
Q​ ​go​ ​up

both​ ​D​ ​and​ ​S​ ​decrease,​ ​but

D​ ​decreases​ ​more...both​ ​P
and​ ​Q​ ​go​ ​down

Example​ ​4:​ ​ ​when​ ​both​ ​D​ ​&​ ​S​ ​change,​ ​and​ ​S​ ​changes​ ​more​ ​than​ ​D

both​ ​D​ ​and​ ​S​ ​increase,​ ​but​ ​S

increases​ ​more...P​ ​goes
down,​ ​and​ ​Q​ ​goes​ ​up

both​ ​D​ ​and​ ​S​ ​decrease,​ ​but​ ​S

decreases​ ​more...P​ ​goes​ ​up,
and​ ​Q​ ​goes​ ​down

KSS​ ​-​ ​Kletke​ ​-​ ​ECON​ ​12 2.3​ ​ ​--​ ​ ​Page​ ​3

 Surplus​ ​&​ ​Shortages

Although​ ​market​ ​equilibrium​ ​clearly​ ​shows​ ​where​ ​P​ ​and​ ​Q​ ​‘should’​ ​be,
it​ ​is​ ​more​ ​likely​ ​that​ ​prices​ ​and​ ​quantity​ ​will​ ​be​ ​at​ ​some​ ​point​ ​above​ ​or
below​ ​the​ ​equilibrium​ ​price.​ ​ ​ ​When​ ​this​ ​happens,​ ​a​ ​surplus​ ​or​ ​shortage
situation​ ​occurs.​ ​ ​A​ ​surplus​​ ​is​ ​where​ ​S​ ​is​ ​greater​ ​than​ ​D​ ​at​ ​a​ ​given​ ​P. surplus​...is​ ​where​ ​the​ ​S​ ​is
greater​ ​than​ ​the​ ​D​ ​at​ ​a
When​ ​there​ ​is​ ​a​ ​surplus,​ ​there​ ​is​ ​downward​ ​pressure​ ​on​ ​P,​ ​until​ ​it given​ ​P
reaches​ ​the​ ​equilibrium​ ​P.​ ​ ​On​ ​the​ ​other​ ​hand,​ ​a​ ​shortage​​ ​occurs​ ​when
D​ ​is​ ​greater​ ​than​ ​S​ ​at​ ​a​ ​given​ ​P.​ ​ ​During​ ​a​ ​shortage,​ ​there​ ​is​ ​upward shortage​...is​ ​where​ ​the​ ​D​ ​is
pressure​ ​on​ ​P,​ ​until​ ​it​ ​reaches​ ​the​ ​equilibrium​ ​P.​ ​ ​For​ ​example,​ ​at​ ​price greater​ ​than​ ​the​ ​S​ ​at​ ​a​ ​given
P
P2​ ​in​ ​the​ ​diagram​ ​below,​ ​there​ ​is​ ​a​ ​surplus​ ​(as​ ​indicated).​ ​ ​Also,​ ​at​ ​price
P3​ ​in​ ​the​ ​diagram​ ​below,​ ​there​ ​is​ ​a​ ​shortage​ ​(as​ ​indicated).

Demand​ ​&​ ​Supply​ ​Model

Understanding​ ​the​ ​demand​ ​and​ ​supply​ ​model​ ​is​ ​invaluable​ ​to​ ​the​ ​study
of​ ​economics.​ ​ ​This​ ​same​ ​model​ ​may​ ​be​ ​applied​ ​to​ ​essentially​ ​any
market​ ​structure.​ ​ ​The​ ​objective​ ​of​ ​this​ ​study​ ​guide​ ​was​ ​to​ ​introduce
the​ ​final​ ​piece​ ​of​ ​the​ ​demand​ ​and​ ​supply​ ​model​ ​-​ ​price​ ​determination.

KSS​ ​-​ ​Kletke​ ​-​ ​ECON​ ​12 2.3​ ​ ​--​ ​ ​Page​ ​4