Unit 2 - Microeconomics
Understanding Market Equilibrium Shifts A Deep Dive
Table of content
📝 Introduction: Just like a seesaw, the market equilibrium tends to go up and down. It stays steady only as long as the forces of demand and supply remain constant. But hey, change is the only constant, right? So, let's understand how these changes affect the market equilibrium.
Chocolate bar craze (Increase in demand)
Imagine that everyone suddenly got a raise at their job. Now they have more money to spend and their craving for chocolate bars goes up (because who doesn't love chocolate!). So, demand increases, shifting the demand curve to the right (from D1 to D2 in Figure 2.3.2a).
At the old price (P1), the chocolate bar fans (buyers) exceed the chocolate bar makers (sellers), creating an excess demand. This gap is like the thirst for chocolate during a diet—it exerts an upward pressure on the price. The price then hikes up like a mountaineer until we reach a new balance (point g) at a higher price (P2) and a higher quantity (Q2). So, everyone is happily munching more chocolate bars, but at a higher price!
Cereal bars sneak In (decrease in demand)
But what if cereal bars, a healthy alternative, suddenly become cheaper? People might shift from chocolate bars to cereal bars, decreasing the demand for chocolate. The demand curve slides leftward like a crab (from D1 to D2 in Figure 2.3.2b).
At the old price (P1), the chocolate bar makers now exceed the fans, creating an excess supply. This overflow puts a downward pressure on the price, dropping it until a new balance is struck (point g) at a lower price (P2) and a lower quantity (Q2). Now, fewer chocolate bars are being eaten and they're cheaper, too!
Wheat thrives (Increase in supply)
Let's say a new technology makes farming wheat super efficient, almost like a superpower! This boom in wheat farming increases supply, moving the supply curve rightward (from S1 to S2 in Figure 2.3.3a).
With the old price (P1), wheat farmers are now producing more wheat than consumers need, causing an excess supply. The excess wheat puts downward pressure on the price, dropping it until we find a new equilibrium (point h) with a lower price (P2) and a higher quantity (Q2). So, there's a wheat party with more wheat available at a lower price!
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Unit 2 - Microeconomics
Understanding Market Equilibrium Shifts A Deep Dive
Table of content
📝 Introduction: Just like a seesaw, the market equilibrium tends to go up and down. It stays steady only as long as the forces of demand and supply remain constant. But hey, change is the only constant, right? So, let's understand how these changes affect the market equilibrium.
Chocolate bar craze (Increase in demand)
Imagine that everyone suddenly got a raise at their job. Now they have more money to spend and their craving for chocolate bars goes up (because who doesn't love chocolate!). So, demand increases, shifting the demand curve to the right (from D1 to D2 in Figure 2.3.2a).
At the old price (P1), the chocolate bar fans (buyers) exceed the chocolate bar makers (sellers), creating an excess demand. This gap is like the thirst for chocolate during a diet—it exerts an upward pressure on the price. The price then hikes up like a mountaineer until we reach a new balance (point g) at a higher price (P2) and a higher quantity (Q2). So, everyone is happily munching more chocolate bars, but at a higher price!
Cereal bars sneak In (decrease in demand)
But what if cereal bars, a healthy alternative, suddenly become cheaper? People might shift from chocolate bars to cereal bars, decreasing the demand for chocolate. The demand curve slides leftward like a crab (from D1 to D2 in Figure 2.3.2b).
At the old price (P1), the chocolate bar makers now exceed the fans, creating an excess supply. This overflow puts a downward pressure on the price, dropping it until a new balance is struck (point g) at a lower price (P2) and a lower quantity (Q2). Now, fewer chocolate bars are being eaten and they're cheaper, too!
Wheat thrives (Increase in supply)
Let's say a new technology makes farming wheat super efficient, almost like a superpower! This boom in wheat farming increases supply, moving the supply curve rightward (from S1 to S2 in Figure 2.3.3a).
With the old price (P1), wheat farmers are now producing more wheat than consumers need, causing an excess supply. The excess wheat puts downward pressure on the price, dropping it until we find a new equilibrium (point h) with a lower price (P2) and a higher quantity (Q2). So, there's a wheat party with more wheat available at a lower price!
Unlock the Full Content!
Dive deeper and gain exclusive access to premium files of Economics SL. Subscribe now and get closer to that 45 🌟