P 1 q q 1 q 2 gustavo indart slide 31 a shift in the

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P 1 Q Q 1 Q 2
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© Gustavo Indart Slide 31 A Shift in the Supply Curve A B If at price P 1 the quantity supplied increases to Q 2 , then the supply curve has shifted down to the right. P S S’ P 1 This means that at least one of the variables that determine the position of the supply curve has changed. Initially, at price P 1 the quantity supplied is Q 1 . Q Q 1 Q 2
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© Gustavo Indart Slide 32 Determination of Equilibrium Price by Demand and Supply The price of a good regulates the quantity demanded and the quantity supplied of that good There is only one price at which the quantity demanded and the quantity supplied are equal this is the equilibrium price At any price below the equilibrium price the quantity demanded exceeds the quantity supplied this is called a situation of excess demand At any price above the equilibrium price the quantity supplied exceeds the quantity demanded this is called a situation of excess supply
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© Gustavo Indart Slide 33 Demand and Supply of Apples 10 1 6 9 2 5 7 3 4 4 4 3 1 6 2 0 9 1 Quantity Supplied Quantity Demanded Price
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© Gustavo Indart Slide 34 Demand and Supply of Apples 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 8 9 10 Tons/week Price Quantity Demanded Quantity Supplied
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© Gustavo Indart Slide 35 Laws of Demand and Supply 1. A rise in demand causes an increase in both the equilibrium price and the equilibrium quantity traded 2. A fall in demand causes a decrease in both the equilibrium price and the equilibrium quantity traded 3. A rise in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity traded 4. A fall in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity traded
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© Gustavo Indart Slide 36 A Change in Demand An increase in demand causes equilibrium price to increase to P 2 and equilibrium quantity to increase to Q 2 . A decrease in demand causes equilibrium price to decrease to P 3 and equilibrium quantity to decrease to Q 3 . A B D’’ C S P P 2 P 1 P 3 Initially, equilibrium is at price P 1 and quantity Q 1 . D’ D Q Q 3 Q 1 Q 2
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© Gustavo Indart Slide 37 A Change in Supply A decrease in supply causes equilibrium price to increase to P 3 and equilibrium quantity to decrease to Q 3 . P S’ A B C S’’ An increase in supply causes equilibrium price to decrease to P 2 and equilibrium quantity to increase to Q 2 . S P 3 P 1 P 2 Initially, equilibrium is at price P 1 and quantity Q 1 . D Q Q 3 Q 1 Q 2
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© Gustavo Indart Slide 38 Government-Controlled Prices Equilibrium in a free market is reached when the quantity demanded and the quantity supplied are equal The government can intervene in the economy and upset this equilibrium by imposing, for instance, a price floor or a price ceiling A price floor is the minimum price that can be charged for a commodity A price ceiling is the maximum price that can be charged for a commodity
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© Gustavo Indart Slide 39 Price Floor A price floor has no effect when it is set below the equilibrium price A price floor is effective only when it is set above the equilibrium price If a price floor is set above the equilibrium price, the quantity traded is determined by the quantity demanded Therefore, effective price floors lead to excess supply
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© Gustavo Indart Slide 40 Effect of a Price Floor D E A B An effective price floor
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