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University of Houston – Clear Lake BAPA5031

BAPA 5031: SURVEY OF BUSINESS PRINCIPLES


READING HANDOUT: INTRODUCTION TO MICROECONOMICS AND MARKETS

LEARNING OBJECTIVES

 Describe the elements and interpretation of economic models.

 Define the law of demand and how it translates to a graphical representation of market
demand.

 Identify factors that shift market demand.

 Define the law of supply and how it translates to a graphical representation of market supply.

 Identify factors that shift market supply.

 Describe the market equilibrium and the market adjustments that occur if a market is not in
equilibrium.

 Explain and graph market adjustments from shifts in demand and supply.

WHAT IS ECONOMICS?

Economics is the study of choice. Different entities will have different choices to make, but they
all share a similar structure in which the choice is intended to satisfy some objective but is
constrained by the availability of resources and time. Consider the three main units of economic
analysis: individuals, firms/businesses, and government. As individuals, we must make choices
that determine how we live. We make choices such as:

 How much food do I buy at the grocery store?


 Do I go to the movies, or stay home and read a book?
 Will I work at a job, and if so, how many hours will I work?
 How much will I exercise? Will I exercise at all?

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All of these choices involve some thought about how we should use our resources and our time.
Firms and governments must make choices as well. Firms must choose how many employees to
hire and what prices to charge. Governments must decide how much to tax and what
laws/regulations to enact. Whether we are speaking of individuals, firms, or governments, all of
the choices are directed at satisfying some objective, be it an individual’s happiness, a firm’s
profit, or a government’s view on societal well-being.

We can study these choices on two levels. Microeconomics studies choices at the unit-level.
That is, evaluating how a person or a firm or a government will make its choices.
Macroeconomics studies choices at the aggregate-level. When all choices have been made by
people, businesses, and governments, what are the systemic outcomes in our economy? These
outcomes include unemployment, inflation, and production. This brief course is designed to
present the basics of microeconomics.

ECONOMIC MODELS

Economists do not take a willy-nilly approach to explaining how decisions are made. As a social
science, we offer a structured framework that can be used over and over again to evaluate
different choices in a unified way. The aim of this type of approach is to be able to isolate those
factors that are most important in decision-making, and try to understand what happens if those
factors are changed in some way.

There are three basic elements of the economic framework:

Scarcity – The first element of our framework is the acknowledgement that resources are scarce.
For any type of choice, there will be a limit to how much money, time, or other resource is
available to pursue a particular economic action. For example, an individual will have a budget
that determines what goods and services he can afford. There are also just 24 hours in a day (and
most of us need some sleep), so the amount of waking time that we can devote to work and

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home-life is limited. The scarcity of resources places constraints on the choices made by
individuals, firms, and governments.

Costs – There will be costs associated with making any choice. Some of the costs will be explicit
costs – actual money that is paid to acquire something (prices for goods and services, wages paid
to employees, etc.). But economists also consider opportunity costs. An opportunity cost is the
value of a next-best alternative. The idea is that making one choice necessarily means not
making an alternate choice. Studying an extra hour for an exam means that you are giving up an
extra hour of playing with your dog. An automobile manufacturer that dedicates a factory to
producing cars means that it is not producing trucks. The value of these sacrificed activities
should be part of our decision-making.

A type of cost that economists suggest should not be considered in decision-making is a sunk
cost. A sunk cost is a cost that has been incurred and is not recoverable. For example, if you
bought a textbook for a course and could not return it for a refund, then the cost of that book is a
sunk cost. Another example might be the money spent by a business on scouting locations for a
new factory. These costs cannot be recovered and therefore should not have a bearing on making
choices. If you know that you are going to fail a class, the money you already paid for a book
should not influence your decision to withdraw from the course. It is the proverbial “spilled
milk” and your decision should be whether to clean it or not. You cannot un-spill it.

Maximization – We assume that choices are made in the pursuit of maximizing some objective.
Individuals are assumed to maximize utility – a notion of satisfaction or happiness. Firms are
assumed to maximize profit. A critical part of maximization is the evaluation of choices at the
margin. For individuals, marginal choices relate to the benefits of working one more hour,
buying one more beer, or running one more mile. For firms, marginal choices include the profit
associated with one more unit of production, one more employee, or a one-cent increase in price.

The basic idea is that to maximize the value of some outcome, we should continue to do
something as long as it adds more to the value than it takes away. Take the example of a firm’s
decision of how much to produce in order to maximize its profit. Every time one more unit of a

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good is produced, it will generate additional revenue (when sold) but also incur additional costs
(to produce it). If the added revenue exceeds the added cost, then one more unit will increase
overall profit and the firm should produce another unit. If a firm sells one more toy for $5 and it
cost $3 to make it, then selling that additional toy will increase profit by $5 - $3 = $2.

The framework that incorporates these three basic elements results is an economic model. By
making some simplifying assumptions, economists can use their models to evaluate real-world
decision-making while focusing on those factors most relevant to a particular decision. These
models are like road maps. In driving from City A to City B, the relevant information will be the
roads that get us from one place to the other. This is what we see on the map. We do not need to
know every rock, tree, and house that is along the way, and so the map ignores this information.

In addition to the three elements described above, we can add a few points about the specifics of
economic models. First, models will include constant and variable information. Constant
information will not change while variable information will change. Separating information into
these categories allows economists to operate under the “other things being constant”
assumption: for a given economic activity, some factors will be held constant while a few
isolated factors will be allowed to change.

Second, economic models can be presented graphically and mathematically. Graphs are really
just a way to represent a mathematical relationship between two factors (one on the x-axis and
the other on the y-axis). But if we want to think about more than two factors, or if we want to be
a bit more sophisticated in structuring a model, then we can use mathematical formulas.

Finally, economists try to keep in mind two issues with the interpretation of our models. We try
be clear about causality – which factors would cause changes in other factors. This is different
from saying that two factors are associated. For example, it has been observed that children who
live in homes with more books tend to do better at school. We might be tempted to say that
reading those books makes the kids smarter; that is, books cause good grades. However we
might also think that smart parents would typically have more books in the home, and so their

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kids do better in school because of their DNA, and not because they read more. In this case,
books and school outcomes are just associated.

Economists also recognize the difference between positive and normative statements. Positive
statements reflect “what is” while normative statements suggest “what ought to be”. For
example, we can show that people spend more when their incomes go up. A positive statement is
therefore, “Higher income results in more spending.” A normative statement might be, “The
government should reduce taxes to increase spending.” The latter takes a relationship that is
taken as fact (higher income means more spending) but places it into the context of a policy
suggestion. As you can imagine, disagreement is much more common with respect to normative
statements then positive statements.

MARKETS

Ultimately, the choices that individuals and businesses make will require interaction with another
party. If an individual is going to buy something, then a business will have to sell it. If a business
is going to produce something, then it will need to hire individuals to work. Markets facilitate
these interactions. Markets are the organized processes in which goods, services, and resources
are exchanged between buyers and sellers. Product markets involve the exchange of goods and
services, such as cars, computers, and healthcare. Resources markets involve the exchange of
resources used for production, such as labor and raw materials. In both types of markets there
will be a demand-side represented by those who want to acquire the good, service, or resource,
and a supply-side represented by those who are providing the good, service, or resource.

Economic models typically characterize markets as a relationship between two variables: price
and quantity. We can consider other factors that may influence the demand-side and supply-side
of a market, but for now we will hold these constant. Since we have two variables, a convenient
way to represent their relationships is on a graph with each axis representing possible values of
each variable:

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Figure 1: Price and Quantity Axes for Market Models

On the vertical axis we have possible values for price in the market, and on the horizontal axis
we have possible quantities that would be produced and/or purchased. For this model to be useful
we need to identify that expected relationships between price and quantity for each side of the
market. We begin with market demand.

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MARKET DEMAND

Market demand is a representation of the quantity of a good or service that is demanded by


consumers at different prices of the good or service. In our graphical model this is depicted by a
downward-sloping line. The negative slope reflects an expected inverse association between the
price of a market good and the quantity of the good that is demanded by consumers. That is, for
most goods and services, we expect consumers to want more at lower prices and less at higher
prices. This is the so-called law of demand.

Why might we expect this? We can offer two basic reasons. First, there is an expected
substitution effect. When the price of a particular good decreases, it becomes cheaper relative to
other goods. Consumers would be expected to substitute to the cheaper good and away from the
more expensive goods. For example, consider the market for touchscreen tablets. If the price of
tablets falls, then products that consumers would also consider buying – like PCs – become
relatively more expensive. Consumers would switch to buying more tablets and fewer PCs.

We can also argue for an income effect. When the price of a good falls, consumers can buy more
of it with a given level of income. For example, suppose a business has $10,000 to buy
computing equipment for its employees. If touchscreen tablets are $500 then the business can
buy 20 units. If tablets are $200 then the business can buy 50 units. The budget is the same, but
the lower price allows the business to buy more.

Both of these effects suggest an inverse relationship between the price of a good and the quantity
demanded by consumers. Consider our market for tablets: a demand line might look something
like this:

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Figure 2: Market Demand for Touchscreen Tablets

600
500
400
Price
300
200
100

10 20 30 40 50 60
Quantity

We can see that consumers are willing to buy more tablets as the price declines in the market. At
P = $500, consumers are willing to buy 20 tablets. At P = $200, consumers are willing to buy 50
tablets. The demand line is a representation of the demand schedule that numerically depicts
how much consumers want to buy at different prices. The demand line given above was taken
from the following hypothetical demand schedule:

Market for Touchscreen Tablets


Price per Quantity Demanded
unit (millions)
$600 10
$500 20
$400 30
$300 40
$200 50
$100 60

There are some issues to keep in mind as we move forward. First, we must remember that the
demand line is part of an economic model. We would not expect every demand relationship to be

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perfectly linear in real life. Most demand relationships would have some nonlinear shape to
them. But even in these cases, we would expect there to be a general inverse relationship
between price and quantity demanded such that whatever the shape of the demand relationship, it
would show a downward-sloping trend in our model. The linear demand curve is an
approximation of this general relationship.

Figure 3: Nonlinear Demand (in Black) with Linear Approximation (in Red)

Another issue to keep in mind is that while we expect most goods and services to exhibit an
inverse relationship between market price and quantity demanded, the strength of this
relationship will vary. For some goods, consumers will not be very sensitive to price and may
change their quantity demanded very little in response to changes in price. Gasoline tends to be
in this category. For other goods, consumers may be quite sensitive and substantially change
their quantity demanded in response to changes in price. Leisure air travel tends to be of this
type. Economists call this sensitivity the price elasticity of demand. Goods for which
consumers are very sensitive to price are called price elastic goods, and those that for which
consumers are less sensitive to price are called price inelastic goods. The degree of price
sensitivity would influence the slope of the demand line (flatter if more elastic, steeper if more

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inelastic), but we still expect an inverse association (downward slope) between price and
quantity demanded for most goods and services.

So far we have only considered the relationship between price and quantity demanded. What
about other factors that may influence demand? A given demand line assumes that all factors
besides price are held constant: incomes, tastes, and anything else that may influence demand is
assumed to be fixed. A given demand line only reflects a relationship between price and quantity
demanded. If any of these other factors were to change then the demand line would shift to
indicate an overall higher demand in the market or an overall lower demand in the market. For a
change that results in an increase to overall demand, the demand line will shift up and right
indicating a higher quantity demanded for any given price (movement (1) in Figure 4). For a
change that results in a decrease to overall demand, the line will shift back and to the left
indicating a lower quantity demanded for any given price (movement (2) in Figure 4).

Figure 4: Shifts in Market Demand

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What are some of the outside factors that may influence demand? The following list is not
exhaustive by any means, but it provides some of the more prominent influences that economists
expect on the demand in most markets:

Consumer incomes – For most goods we expect an increase in overall incomes to result in an
increase in overall demand. That is, if incomes go up – say from a growing economy – then
consumers want more of a good or service and the demand line shifts to the right. These types of
goods are called normal goods. For some goods the relationship may go the other way: an
increase in incomes results in a decrease in overall demand. These goods are called inferior
goods, and can include fast food, cheap liquor, and budget cars. Most goods are normal goods
and this is what we will assume unless noted otherwise.

Changes in the prices of related goods – Economists classify two types of goods-relationships:

Goods are substitutes if an increase in the price of one good results in higher
demand for the second good.

Goods are complements if an increase in the price of one good results in lower
demand for the second good.

For the case of substitute goods, consider an example of spruce lumber and pine lumber, both
types of wood used to build homes. If the price of spruce lumber were to increase, then we would
expect home builders to switch towards the now-cheaper pine lumber. This would increase the
overall demand for pine lumber and shift its market demand to the right.

For the case of complement goods, consider an example of video games and video game
consoles. Consoles are needed to play games. If the price of video games were to increase, then
we would expect a decrease in the quantity demanded for those games. Further, since there is a
lower quantity demanded for games, consumers would need fewer consoles and the overall
demand in that market would decrease (shift left).

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Population – An increase in the relevant population for a market would be expected to increase
the overall demand in that market. For example, higher growth in the population of elderly
people would be expected to result in an overall increase in the demand for certain types of
medical care (shift right).

Consumer tastes – As something of a “catch all”, any change to consumer tastes will affect the
overall demand for a good or service. Tastes can be influenced by education, advertising,
technology, cultural conventions, and other factors. For example, education about the damaging
effects of smoking would be expected to reduce the overall demand for cigarettes (shift left).
Social conventions that begin to place emphasis on environmental sensitivity would be expected
to increase the overall demand for renewable energy products (shift right).

In all of these cases, we consider the effect from a change in some factor as being isolated from
anything else. For example, an increase in income may be expected to increase the demand for
large vehicles. By itself, the income effect suggests a right-shift in the market demand. In
practice, there may be multiple forces at work at the same time. It could be the case that people
are also becoming more concerned about energy efficiency and changing tastes are pulling down
market demand for large vehicles. Higher incomes are predicted to pull up demand, while
changing tastes are predicted to pull down demand. The trick is to identify which force is
stronger.

MARKET SUPPLY

Market supply is a representation of the quantity of a good or service that is willing to be


supplied by producers at different prices of the good or service. In our graphical model this is
depicted by an upward-sloping line. The positive slope reflects an expected positive association
between the price of a market good and the quantity of the good that is supplied by producers.
That is, for most goods and services, we expect producers to want to sell more at higher prices
and less at lower prices. This is the so-called law of supply.

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We can offer two reasons for this expected relationship. First, higher prices are more attractive to
firms. Firms would be expected to shift production resources to higher-priced goods and away
from lower-priced goods, thus increasing the quantity supplied of the former. For example, if the
prices of touchscreen tablets were to increase, then firms could shift production resources away
from laptops to make more tablets. A second reason is that higher prices are better able to
compensate firms for the opportunity costs of not producing other goods. For example, if the
price of tablets is high, then firms can better justify not producing laptops.

A market supply line for our market for touchscreen tablets might look something like this:

Figure 5: Market Supply for Touchscreen Tablets


600
500
400
Price
300
200
100

20 30 40 50 60 70
Qauntity

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Just like market demand, the market supply line is based on a supply schedule. In this example
we would have:

Market for Touchscreen Tablets


Price per Quantity Supplied
unit (millions)
$600 70
$500 60
$400 50
$300 40
$200 30
$100 20

Also just like market demand, the market supply line only reflects a relationship between price
and the quantity supplied by firms, and assumes other factors are fixed. If some factor were to
change that increases the overall supply in a market, then the supply line will shift to the right
(movement (1) in Figure 5). If some factor were to decrease overall supply, then the supply line
would shift to the left (movement (2) in Figure 5).

Figure 6: Shifts in Market Supply

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Some of the common factors that can influence the supply in a market are:

Prices of input goods – Firms need inputs such as labor and raw materials to produce the goods
that they sell. If the prices of these inputs were to increase, then the firms’ costs of production
would increase and they would be willing to sell fewer units at a given price. There would be an
overall decrease in market supply (shift left).

Production technologies – Changes to the way that firms actually produce goods can also affect
overall supply. Suppose a new manufacturing technology allows firms to produce more of a
good at a given cost. Firms would be willing to sell more at a market price and overall supply
would increase (shift right).

Number of producers or expansions in capacity – Having more producers in a market would


generally be associated with an increase in overall market supply (shift right). In a similar way,
expansions in existing firms’ capacities (e.g. from infrastructure investment) would also increase
supply.

Opportunity costs of alternate production – Anything that affects the attractiveness of other
production choices may influence market supply. For example, suppose gas prices stay high and
the demand for large vehicles decreases. For an automobile manufacturer, the attractiveness of
making large vehicles has been reduced (i.e. the opportunity cost has decreased). This makes the
production of smaller, fuel-efficient cars more attractive and firms shift resources to making
those. Market supply for smaller vehicles increases (shifts right).

Natural (or unnatural) events – Finally, outside events may affect market supply. Droughts,
natural disasters, and armed conflicts can all result in lower market supplies of particular goods.
For example, after the 2011 tsunami that hit Japan, certain automobile and computer parts

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experienced a reduction in market supply because of the destruction of infrastructure. Outside


events can also increase supply, such as plentiful agricultural harvests that arise from favorable
weather patterns.

Other factors can also influence market supply, including government policies (taxes, subsidies,
and regulations) and firms’ expectations about future events. In general, any change that reduces
production costs or makes production more attractive will increase market supply (shift right),
and any change that increases costs or makes production less attractive will decrease supply
(shift left). It is also worth repeating that just like the case of market demand, we consider the
effect from a change in some supply factor as being isolated from anything else.

PUTTING IT TOGETHER: MARKET OUTCOMES

Our economic model of supply and demand provides a framework for understanding basic
market outcomes. Let us go back to the demand and supply schedules for our hypothetical
touchscreen tablet market:

Market for Touchscreen Tablets


Price Quantity Demanded Quantity Supplied
$600 10 70
$500 20 60
$400 30 50
$300 40 40
$200 50 30
$100 60 20

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Notice that there is an “agreement” at the market price of $300. At that price, consumers
want 40 million tablets and firms are willing to sell 40 million tablets. We can see this
graphically by combining the demand and supply lines into a single diagram:

600 Figure 7: Market for Touchscreen Tablets

Supply
500
400
Price
300
200

Demand
100

0 20 40 60 80
Quantity

The price and quantity that occur at the intersection of supply and demand reflect a market
equilibrium. The market equilibrium is a price-quantity combination such that for a given price,
the quantity demanded by consumers is equal to the quantity supplied by firms. The equilibrium
price is the price that we would expect to observe in a market. Why? As we will show now, any
other price would be associated with market adjustments that just bring us back to the
equilibrium.

Let us think about what would happen if the market were not in equilibrium. This can arise from
two possibilities: the market price is higher than the equilibrium price, or the market price is
lower than the equilibrium price. We can consider each in turn:

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Market price is higher than equilibrium – Consider a price PH that is higher than the
equilibrium price, which we will call P*. If we follow PH from the vertical axis to the right, we
see that the first line we intersect is market demand (point a in Figure 8) and the second line we
intersect is market supply (point b). This means that at PH the quantity that firms want to supply
is greater than the quantity that consumers want to buy. We call this excess supply or a surplus.
The price is so high in the market that consumers do not want to buy so much, but firms would
find it very attractive to sell a lot. There is not an agreement between supply and demand.

So what happens next? The firms could produce a lot, but at the high price they would be stuck
with unsold goods. They are forced to lower prices. As prices decrease, two things happen: firms
produce less (movement down and left along the supply line) and consumers buy more
(movement down and right along the demand line). Eventually the two meet each other and the
market is brought to the equilibrium.

Market price is lower than equilibrium – Consider a price PL that is lower than the equilibrium
price. If we follow PL from the vertical axis to the right, we see that the first line we intersect this
time is market supply (point c in Figure 8) and the second line we intersect is market demand
(point d). This means that at PL the quantity that firms want to supply is less than the quantity
that consumers want to buy. We call this excess demand or a shortage. The price is so low in
the market that consumers want to buy a lot but firms do not want to sell so much at a low price.
Again we have disagreement between supply and demand.

So what happens next? Firms would be able to recognize that consumers are eager to buy at the
low price. They would sense their ability to raise prices and still sell-off their production. Two
things happen as prices increase: firms produce more (movement up and right along the supply
line) and consumers buy less (movement up and left along the demand line). Eventually the two
meet each other and the market is brought to the equilibrium.

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Figure 8: Out-of-Equilibrium Market Outcomes

These market forces are always assumed to be at play. For some context, consider the housing
market of a large neighborhood with several homes for sale. Suppose that no one seems to be
buying the homes. Open house traffic is slow, and no offers are coming in. This would be a
signal that the average price of the homes is too high, and sellers would need to lower their
prices to attract demand.

Now suppose that there is a rush to buy. There is a sudden interest with multiple offers coming in
and the initial sales are fast and furious. This is a signal that the average prices are too low, and
sellers would be able to increase their selling prices in the market. In both of these cases, market
activity results in prices adjusting higher or lower to an equilibrium.

In summary, if a market price is higher than the equilibrium price, the market would experience
excess supply and prices would adjust downward. If a market price is lower than the equilibrium
price, the market would experience excess demand and prices would adjust upward.

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Up until now, we have assumed that supply and demand are unmoving in the market. What
happens if the market experiences a structural change that shifts overall demand or supply?
Generally speaking, and shift in supply or demand will create the out-of-equilibrium outcomes
discussed above (i.e. excess demand and excess supply), requiring market adjustments to a new
equilibrium.

We can think about the market adjustments in three steps. First, we will have a shift in either
supply or demand. Second, the shift will result in either excess demand or excess supply. Third,
price adjustments will bring the market to a new equilibrium. To look at these adjustments in our
model, let us first think about an overall increase in the demand for touchscreen tablets that could
occur from any of the factors that were discussed above in the Market Demand section. Figures
9a – 9c show the three-step adjustment to the new market equilibrium:

Step 1: Demand shifts right. The market starts at an equilibrium price P*1 and quantity Q*1.
Overall demand increases resulting in a shift from D1 to D2 (movement (1)):

Figure 9a: Shift in Market Demand

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Step 2: Excess demand. If the market price stays at P*1 then we will have excess demand. This
can be seen by tracing P*1 to the right: we first intersect the supply line (point a) and then the
new demand line (point b). Note that after the shift in demand, D1 no longer exists in the market.
The gap between a and b reflects the excess demand in the market.

Figure 9b: Excess Demand at the Original Market Price

Step 3: Upward price adjustment. We know from our discussion above that excess demand will
put upward pressure on the equilibrium price. In Figure 9c we see that the upward pressure
brings us to a new higher equilibrium price of P*2. This is accompanied by an increase in the
market quantity to Q*2.

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Figure 9c: The New Market Equilibrium

In summary, an increase in overall demand will: 1) shift market demand to the right, 2) result in
excess demand at the original equilibrium price, and 3) cause an upward price adjustment to a
higher equilibrium price and higher equilibrium quantity. Any increase in overall demand will
always follow this story. It does not matter what caused the increase in demand.

Now let us look at a change to market supply. Suppose that market supply increases for any of
the reasons discussed in the Market Supply section. Figures 10a-10c show the three-step market
adjustment:

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Step 1: Supply shifts right. The market starts at an equilibrium price P*1 and quantity Q*1.
Overall supply increases resulting in a shift from S1 to S2 (movement (1)):

Figure 10a: Shift in Market Supply

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Step 2: Excess supply. If the market price stays at P*1 then we will have excess supply. Tracing
P*1 to the right, we first intersect the demand line (point a) and then the new supply line (point
b); the gap reflects excess supply. Note that after the shift, S1 no longer exists in the market.

Figure 10b: Excess Supply at the Original Market Price

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Step 3: Downward price adjustment. We know from our discussion above that excess supply
will put downward pressure on the equilibrium price. In Figure 10c we see that the downward
pressure brings us to a new lower equilibrium price of P*2. This is accompanied by an increase in
the market quantity to Q*2.

Figure 10c: The New Market Equilibrium

In summary, an increase in overall supply will: 1) shift market supply to the right, 2) result in
excess supply at the original equilibrium price, and 3) cause a downward price adjustment to a
lower equilibrium price but higher equilibrium quantity. Just like the changes to market demand,
any increase in overall supply will always follow this story. It does not matter what caused the
increase in supply.

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We have just considered increases in market demand and market supply. Of course, we could
also consider decreases in these sides of the market. The four possible stories in our model are
summarize in the following table:

Shift: Excess demand/supply? Market adjustment:


Market demand increases Excess demand Higher price, higher quantity
Market supply increases Excess supply Lower price, higher quantity
Market demand decreases Excess supply Lower price, lower quantity
Market supply decreases Excess demand Higher price, lower quantity

CONCLUSION

This handout has presented an introduction to the social science of economics and the basic
market model. The market model provides a structured framework to evaluate how changes to
the demand-side or supply-side of a market would be predicted to influence the market price. We
looked at changes to demand and supply in isolation of each other, but in practice there may be
several factors that are changing at the same time, creating opposing forces in the market. In
these cases, it is a matter of which force will be strongest and ‘win-out” over the others. This is
one of the main limitations of economic models: we have good ideas about how various factors
will influence changes to market outcomes, but the magnitudes of those changes are much more
difficult to predict.

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