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Economists say that a market will tend
toward equilibrium, which means that
the price and quantity will gradually move
toward their equilibrium levels. Why does
this happen? Remember that excess
demand will lead firms to raise prices.
Higher prices induce the quantity supplied
to rise and the quantity demanded to fall
until the two values are equal.

On the other hand, excess supply will
force firms to cut prices. Falling prices will
cause quantity demanded to rise and
quantity supplied to fall until, once again,
they are equal. Through these relationships,
the market price and quantity sold
of a good will move toward their equilibrium

Remember from Chapters 4 and 5 that
all of the changes in demand and supply
described above are changes along a
demand or supply curve. Assuming that a
market starts at equilibrium, there are two
factors that can push it into disequilibrium:
a shift in the entire demand curve
and a shift in the entire supply curve



What do companies do when there is excess demand for a product?
lower prices
raise prices
change the product


What happens to the supply of a product when prices rise?
The company will produce more of the product, supply will increase
The company will do nothing
The company will produce less of the product, supply will decrease
The company will reduce prices


What happens when the quantity of a product increases along with an increase in prices?
demand for the product will increase
there will be no change in supply or demand
demand for the product will decrease
prices will rise even more


What happens to the market when the supply for a product equals the demand for the product?
the market is in disequilibrium
the market is falling
the market is in equilibrium
the market is rising
Factors that reduce supply shift the supply curve to the left, while factors that increase supply move the supply curve to the right.
Changes in Price
In Chapter 5, you read about the different
factors that shift a supply curve to the left
or to the right. These factors include
advances in technology, new government
taxes and subsidies, and changes in the
prices of the raw materials and labor used
to produce the good.

Since market equilibrium occurs at the
intersection of a demand curve and a
supply curve, a shift of the entire supply
curve will change the equilibrium price and
quantity. A shift in the supply curve to the
left or the right creates a new equilibrium.
Since markets tend toward equilibrium, a
change in supply will set market forces into
motion that lead the market to this new
equilibrium price and quantity sold.


Where does market equilibrium occur in a chart?
The lowest point on the demand and supply curve
The highest point on the supply curve
The highest point on the demand curve
The point at which the supply curve and the demand curve cross


What can cause a change in the price of a product? (select all that apply)
government regulations
new costs of raw material
government subsidies
labor costs
the ethnicity of the consumers
new technology
the political party of the administration
As CD players become cheaper to produce, the supply increases at all but the lowest prices.
Understanding a Shift in Supply
When compact disc players were first introduced in the early 1980s, a basic, single-disc machine cost around $1,000. The early compact disc players were much more expensive and less sophisticated than the compact disc players people use today. Gradually, as firms developed better technology for producing compact disc players, their prices fell. In 1990, a consumer could purchase a fancy single-disc player for $300; just five years later, in 1995, a similar player could be purchased for about $200. Today, consumers can buy a compact disc player for less than $100.

Not only have the prices of compact disc players fallen, but the machines on sale today have many more features and options than the original $1,000 machine. . 

Technology has lowered the cost of manufacturing compact disc players and has also reduced the costs of some of the inputs, like computer chips. These advances in production have allowed manufacturers to produce compact disc players at lower costs. Producers have passed on these lower costs to consumers  in the form of lower market prices

We can use the tools developed in Chapter 5 to graph the effect of these changes on the CD market? ’s supply curve. Figure 6.5 shows how the supply curve shifted outward, or to the right, as manufacturers offered more and more CD players at lower prices. In the early 1980s, no compact disc players were offered for $300. They were simply too expensive to develop and manufacture. Today, manufacturers can offer millions of CD players at this price.


What factor is most important in reducing the cost and quality of CD players through the years.
More people are listening to music than before
Technology has reduced the cost and improved the quality of CD Players
Hip Hop and Rap are better music than classical music
More people can afford CD Players


Technology has reduced the cost of CD players by lowering the cost of manufacturing. What other factor has technology helped to reduce cost?
component parts
marketing in multiple outlets such as Costco
advertising the product
the popularity of country/western music


Normally demand will influence the supply of a product until an equilibrium point is reached between supply and demand. What happens to the supply curve if an outside force, such as technology, influences both supply and demand causing them both to increase?
the demand and supply curve will shift to the left
supply will decrease
the demand and supply curve will shift to the right
demand will decrease while supply increases
Finding a New Equilibrium
Picture the point in time when compact disc players were evolving from an expensive luxury good to a mid-priced good. A new generation of computer chips has just reduced the cost of production. These lower costs have shifted the supply curve to the right where at each price, producers are willing to supply a larger quantity.

This shift, shown in Figure 6.6 using fictional quantities, has thrown the market into disequilibrium. At the old equilibrium price, suppliers are now willing to offer 4,000,000 compact disc players, up from 2,000,000.

In Figure 6.6, the increase in quantity supplied at the old equilibrium price is shown as the change from point a to point b. However, the quantity demanded at this price has not changed, and consumers will only buy 2,000,000 compact disc players. At this market price, unsold compact disc players will begin to pile up in the warehouse. When quantity supplied exceeds quantity demanded at a given price, economists call this a surplus. The surplus compact disc players are excess supply, so something will have to change to bring the market to equilibrium.

As you read in Section 1, suppliers will respond to excess supply by reducing prices. As the price falls from $600 to $400, more consumers decide to buy compact disc players, and the quantity demanded rises. The combined movement
of falling prices and increasing quantity  demanded can be seen in Figure 6.6 as a change from point a to point c. Notice that this change is a movement along the demand curve, not a shift of the entire demand curve.

Eventually, the price falls to a point where quantity supplied and quantity demanded are equal, and excess supply is no longer a problem. This new equilibrium point, shown at point c in Figure 6.6, marks a lower equilibrium price and a higher equilibrium quantity sold than before the supply curve shifted. This is how equilibrium changes when supply increases, and the entire supply curve shifts to the right.

When supply increases, prices fall, and quantity demanded increases to reach a new equilibrium.


How do producers react when production costs have decreased because of technology?
producers decrease the supply
producers do nothing because of price instability
producers increase the supply
producers try to avoid the cost of technology


What do economists call it when supply exceeds demand?


When supply changes from point a to point b we have a situation called
excess demand


What has to happen to the chart above to reach market equilibrium?
new technology will have to be introduced to increase supply
the price moves to a point where quantity supplied and quantity demanded are equal
new technology will have to be avoided
the price falls to a point where quantity supplied and quantity demanded are equal


Market equilibrium is illustrated in the chart above by points
a and b
b and c
a and c
equilibrium is not illustrated on this chart


What happened when the supply curve shifted from point a to point c?
lower price and greater supply
increased supply and price
lower supply but greater price
lower supply and price
A Fall in Supply
Just as new technology or lower costs can shift the supply curve to the right, so other factors that reduce supply can shift the supply curve to the left. Consider the market for cars. If the price of steel rises, automobile manufacturers will produce fewer cars at all price levels, and the supply curve will shift to the left. If auto workers strike for higher wages, and the company must pay more for labor to build the same number of cars, supply will decrease. If the government imposes a new tax on car manufacturers, supply will decrease. In all of these cases, the supply curve will move to the left, because the quantity supplied is lower at all price levels.

When the supply curve shifts to the left, the equilibrium price and quantity sold will change as well. This process is the exact opposite of the change that results from an increase in supply. As the supply curve shifts to the left, suppliers raise their prices and the quantity demanded falls. The new equilibrium point will be at a spot along the demand curve above and to the left of the original equilibrium point. The market price is higher than before, and the quantity sold is lower


What will happen to the supply curve if production costs rise dramatically?
Will shift to the right
Will remain stationary
Will shift to the left
Will move to the right and left


What happens as the supply curve shifts to the left?
suppliers raise their prices and the quantity demanded also rises
suppliers raise their prices and the quantity demanded falls
suppliers lower their prices but there is no change in the quantity demanded
suppliers lower their prices and the quantity demanded falls


If the market price is higher than before, what will happen to the quantity sold
will also be higher
will remain the same
will be lower
market prices can never be higher


What are some of the production costs that can cause a shift in the supply curve? (click all that apply)
a union strike
increased taxes
an increase in the general population
new environmental regulations
Shifts in Demand
Almost every year, around November, a
new doll or toy emerges as a nationwide
fad. People across the country race to
stores at opening time and stand in long
lines to buy that year’s version of Tickle
Me Elmo or Pokmon.

As you read in Chapter 4, these fads
reflect the impact of consumer tastes and
advertising on consumer behavior. Fads
like these, in which demand rises quickly,
are real-life examples of a rapid, rightward
shift in a market demand curve.
Figure 6.7 shows how a rapid, unexpected
increase in market demand will affect the
equilibrium in a market for a hypothetical,
trendy toy.

The Problem of Excess Demand
In Figure 6.7, the fad causes a sudden
increase in market demand, and the
demand curve shifts to the right. This shift
leads to excess demand at the original
price of $24 (point b). Before the fad
began, quantity demanded and quantity
supplied were equal at 300,000 dolls,
shown at point a. On the graph, excess

In the stores that carry the dolls, excess
demand appears as bare shelves and long
lines. Excess demand also appears in the
demand appears as a gap between the
quantity supplied of 300,000 dolls and the
new quantity demanded of 500,000 at
$24, shown at point b. This is an increase
of 200,000 in the quantity demanded.
Economists would also describe this as a
shortage of 200,000 dolls.

In the stores that carry the dolls excess demand appears in the form of search costs—the financial and opportunity costs consumers pay in searching for a good or service. Driving to different stores and calling different towns to find an available doll are both examples of search costs.

In the meantime, the available dolls must
be rationed, or distributed, in some other
manner. In this case, long lines, limits on
the quantities each customer may buy, and “first come, first serve” policies are used to
distribute the dolls among customers.



As illustrated in the chart above an unexpected demand for a new doll will cause the demand curve to 
shift to the right
remain static
shift to the left
be in equilibrium


In the example above, you really want the doll in question and have to spend a great deal of time searching for it in multiple stores. This is an example of
excess supply
technological innovation
a production cost
an opportunity cost


Excess demand which causes the demand curve to shift to the right will
lower price
cause price to remain the same
increase price


As the equilibrium in the chart above shifts from a to c, output changes from
$25 to $30
300 to 400
$5 to $55
300 to 500
Return to Equilibrium
As time passes, firms will react to the signs of excess demand and raise their prices. In fact, customers may actually push prices up on their own if there is “bidding? ” in the market, as there is for real estate, antiques, fine art, and hard-to find items.

If a parent cannot find the doll he wants at the store, he might offer the store keeper an extra $5 to guarantee him a doll from the next shipment. Through these methods, the market price will rise until the quantity supplied equals the quantity demanded at 300,000 dolls. All of these dolls are sold at the new equilibrium price of $30, shown at point c in Figure 6.7.

When demand increases, both the equilibrium price and the equilibrium quantity also increase. The demand curve has shifted, and the equilibrium point has moved, setting in motion market forces that push the price and quantity toward their new equilibrium values.
A Fall in Demand
When a fad passes its peak, demand can fall as quickly as it rose. Excess demand turns into excess supply for the once popular toy as parents look for a new, more trendy gift for their children. Overflowing store shelves and silent cash registers, the symptoms of excess supply, replace long lines and bidding wars.

When demand falls, the demand curve shifts to the left. Suppliers respond by cutting prices on their inventory. Price and quantity sold slide down along the supply curve to a new equilibrium point at point a in Figure 6.7. The end of the fad restores the original price and quantity supplied.

Now that you understand economics it is time for your generation to make some changes


As the demand curve has shifted and the equilibrium point moves, market forces will push the price and quantity 
toward their new equilibrium values
to remain static
toward their new disequilibrium value


If people suddenly loose interest in the new doll, demand can fall quickly
and supply and demand will become frozen along the demand supply curve
and excess supply can turn into excess demand
supply and demand will reach equilibrium
and excess demand can turn into excess supply


This section illustrates the fact that suppliers
react to market forces causing an equilibrium in supply and demand
react slowly to market forces that effect supply and demand
react to market forces causing a disequilibrium in supply and demand
usually ignore market forces that effect supply and demand

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