Course Name/ Course Number

CHANGES IN MARKET EQUILIBRIUM1

Changes in Market Equilibrium

Name

Course Name/ Course Number

Institution

Date

Changes in Market Equilibrium

Micro- and Macroeconomic Principles

Market equilibrium has been identified as one of the most essential concepts in economics to assure oneself of a firm grasp. The point where the hypothetical supply and demand curves intersect, market equilibrium defines the point where the price of a good or service is equal to its demand in the market(Pettinger, 2013). In the illustration of such in Khan Academy’s “Changes in Market Equilibrium” video, tutor Sal identifies both microeconomic and macroeconomic principles. In his look at what happens, for example, when the pear cider industry launches its campaign, Sal identifies consumer behaviors and their impact on a specific supply and demand curve. This is microeconomics, as it studies an individual market and the economy(Pettinger, 2013). In his look at what happens when apples are declared cancer-prevention agents, Sal reveals macroeconomic principles, as he studies the impact more on a national scale than on an individual market scale(Pettinger, 2013).

Shifts in Supply and Demand Curves

In Khan Academy’s take on market equilibrium, one shift in the supply curve is explained with the example of a new modification to the apple. The new fruit is disease-resistant, a benefit that impacts the supply curve by initiating a rise in quantity. As quantity increases proportionate to the disease-resistant qualities, price begins to decrease. Demand for the apple remains steady, as nothing has really occurred to influence consumers to buy more apples (Khan Academy, 2015).

One shift in the demand curve is explained with the example of a study releasing information on how apples prevent cancer. This revelation shifts the demand curve by initiating a rise in demand, as consumers are prompted to make the choice to eat apples and avoid cancer. As demand increases, quantity and price also increase in proportion to keeping up with the curve (Khan Academy, 2015).

Applying Supply and Demand Concepts

Gasoline and the rise and fall of its price point in recent years is a prime example of a real-world product affected by supply and demand. Gas prices spiked in 2005 when Hurricane Katrina disrupted a vital pipeline. With gasoline unable to be delivered in its usual timely manner, demand increased sharply and prices accordingly skyrocketed(Louisiana, 2015).

The same essential thing happened again in 2008 when supply failed to keep up with demand due to rapid growth in Asia (Louisiana, 2015). As demand heightened and quantity dropped, prices rose in response to nearly four dollars per gallon.

Currently, gas prices are lower than they have been in years. This pricing is influenced, again, by a supply and demand curve. “Since 2010, domestic crude oil production has shot up by 2 million barrels a day. Combined with biofuels and liquids made from natural gas, this surge has made the United States the world's largest producer”(Louisiana, 2015). As quantity increased, supply increased. Demand remained largely the same. Prices, due to these forces, fell.

Microeconomics and Shifts in Supply and Demand

Microeconomics is the study of specific individual markets and segments of the economy. It studies things such as consumer activity, supply and demand in individual markets, wage determination, and production issues. Understanding microeconomics can help one understand the factors that shape shifts in supply and demand, ultimately impacting equilibrium of price and quantity.

A good example of microeconomics at work is Khan Academy’s glance at consumer activity associated with the pear cider ad scenario and the supply and demand curve. As consumers responded to the pear cider industry’s ad and began purchasing fewer apples, demand decreased(Khan Academy, 2015). With a drop in consumer activity and falling demand, supply was lowered accordingly with a proportionate drop in order to achieve equilibrium.

Macroeconomics and Shifts in Supply and Demand

*How do the concepts of macroeconomics help you understand the factors that affect shifts in supply and demand on the equilibrium price and quantity?

Macroeconomics, unlike its micro counterpart, is the study of the economy as a whole. It studies “aggregate” variables, such as demand, national production, and inflation.Macroeconomics concerns itself primarily with fiscal policies that impact the economy in its entirety, overall reasons for inflation and/or unemployment, economic growth or stagnancy, international trade, and many others. Understanding these concepts, as well, can help one understand the factors that shape shifts in supply and demand, ultimately creating equilibrium of price and quantity.

A good example of this is Khan Academy’s example of demand and national production associated with the apple-cancer prevention supply and demand curve. In the apple-cancer prevention example, consumers responded to the news that apples prevented cancer by demanding more apples(Khan Academy, 2015). As greater quantities of apples were necessary to satisfy demand, higher prices were needed to create market equilibrium. Ironically, “when firms expect demand to increase, they increase the short-run quantity they supply, which in the aggregate rationalizes the increase in demand” (Colander, 2001).

Price Elasticity of Demand and Effects

Understanding demand, in particular, is central to being able to control supply and wield solid pricing strategy, according to Colander. “Expectations of demand become self-fulfilling,” he states. “These expectations must be fulfilled. If they are not, they will quickly change” (Colander, 2001).

Price elasticity of demand, in particular, is of key importance. The price elasticity of demand measures the rate of response of quantity demanded due to a price change(Moffatt, 2015). This can affect a consumer’s purchasing and a firm’s pricing strategy, as well. Consider the pricing changes shown in the Khan Academy simulation. In the first scenario, prices dropped when new disease-resistant apples were invented and there was no difficulty in acquiring the product. Quantity increased rapidly in response to the pricing change(Khan Academy, 2015). In the second scenario, apples were touted as cancer prevention agents. Demand for the apples increased dramatically, and prices rose proportionately. In response, quantity rose rapidly in order to sell a product at a steep price (Khan Academy, 2015). In the third scenario, a pear cider company positioned a compelling ad campaign that drew attention away from apples and apple juice products. This served to decrease demand and drop prices, as more consumer activity was directed at pears than at apples. Quantity decreased in respect to the drop in demand and pricing (Khan Academy, 2015).

References

Colander, D. (2001). Effective supply and effective demand.Journal Of Post Keynesian Economics,23(3), 375.

Grimsley, S. (2015). Market equilibrium in economics. Retrieved from

Khan Academy. (2015). Changes in market equilibrium. Retrieved from

Louisiana. (2015, January 29). Supply and demand driving gas drop--another view. Retrieved from

Moffatt, M. (2015). The definitive duide to understanding price elasticity. Retrieved from

Pettinger, T. (2013, February 4). Difference Between microeconomics and macroeconomics. Retrieved from