**Perloff 2.1-4, 2.6. WB 1 and 2.**

We review the supply-and-demand model. You will learn why equilibrium happens; how to compute the equilibrium; and how the equilibrium moves with market conditions.

Gans' quizzes on Supply and Demand shifters (in the "More resources" section, below) are a quick way of testing yourself. However, keep in mind that an "increase/decrease in Demand/Supply" is not an up/down shift, but right/left.

# Graphing

- What are on the axes?
- What do the curves represent?
- S is the quantity suppliers want to supply, for every price.
- D is the quantity consumers want to buy, for every price.

- What do the formulas represent?
- Q
_{S}is how much suppliers want to supply at a particular price. - Q
_{D}is how much consumers want to buy at a particular price.

- Q
- Why does S slope up? It does not have to.
- Why does D slope down? The Law of Demand.
- Use demand and supply schedules to graph the curves, marking axes and points.
- Use the formulas to graph the curves, marking axes and intercepts.

# Equilibrium

An *equilibrium* in the supply-and-demand model is an *equilibrium price* P^{*} and an *equilibrium quantity* Q^{*}, at which the quantity demanded equals the quantity supplied: Q_{D} = Q_{S} = Q^{*}.

### Price-taking assumption

We assume that buyers and sellers take prices as given when making decisions.^{1} This is why we say that quantities demanded and supplied respond to price.

Other key assumptions are discussed in Perloff 2.6 and the next topic.

### Computing the equilibrium

- Given formulas for supply Q
_{S}and demand Q_{D}, compute the equilibrium (P^{*},Q^{*}).

# Moving the equilibrium

Changes in market conditions are represented by “shifts” in the supply and/or demand curves. The idea here is that if the curves shift, we can predict where the new equilibrium price and quantity will be.

This before-and-after comparison of equilibria is called *comparative statics*.

### Demand shifters

- What factors shift Demand, and which direction?
- When Demand increases/decreases, how does the curve move?

### Supply shifters

- What factors shift Supply, and which direction?
- When Supply increases/decreases, how does the curve move?

### Shifting the curves

- In which direction does the equilibrium (P,Q) move after Demand/Supply increases/decreases?
- In which direction does the equilibrium (P,Q) move after two shifts?
- Illustrate your answers with a graph.

# Out of equilibrium

A market is out of equilibrium if, at the current price, the quantity supplied Q_{S} is not equal to the quantity demanded Q_{D}. There are two cases:

*Excess demand*or*shortage*Q_{D}>Q_{S}^{2}*Excess supply*or*surplus*Q_{S}>Q_{D}

In the *short run* — after a shift, but before the price adjusts to it — the market may be out of equilibrium.

- Why will equilibrium be restored in this case? (See Perloff p28)
- At a price above/below the equilibrium price, is there excess demand or excess supply?
- Which way will the price move when there is excess supply/demand?

See Applying Supply and Demand for other reasons why a market might be out of equilibrium.

# More resources

- Perloff, Chapter 2 ``Supply and Demand''
- Quizzes
- Applications

- Stiglitz and Walsh, Chapter 4 ``Demand, Supply and Price''
- Narrated lecture with graphs
- Quizzes
- FAQs and pitfalls

- Krugman and Wells, Chapter 3 “Supply and Demand”
- Gans