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Market equilibrium: Again Price per lb. Salmon Market S $5.50 At a price of $5.50, consumers can buy all they wish to buy. Sellers may sell all they wish at that price as well. D 0 800 Quantity (lbs) Why should the salmon market “tend toward equilibrium”? Price per lb. Surplus S A B $8.00 $5.50 At a price of $8/lb., quantity supplied exceeds quantity demanded by 700 lbs. D 0 325 800 1025 Quantity (lbs) When the price exceeds its equilibrium value, price competition among sellers will tend to push the price down. A salmon shortage should drives prices up. Price per lb. S $5.50 $4.00 At a price of $4/lb., quantity demanded exceeds quantity supplied by 700 lbs. H K D Shortage 0 500 800 1200 Quantity (lbs) Effect of a change in demand Demand could shift right (increase) due to Increase in the price of red snapper, orange roughy, etc. Price per lb. Salmon Market $6.50 $5.50 S 1 2 Increase in consumer incomes (normal good). D1 0 800 920 D2 Change of preferences Quantity (lbs) Effect of a change in demand, part 2 Demand could shift left (decrease) due to Decrease in the price of red snapper, orange roughy, etc. Price per lb. Salmon Market $6.50 $5.50 S 1 Decrease in consumer incomes. 2 Change of preferences D1 0 800 920 D2 Quantity (lbs) Effect of a change in supply Price per lb. Salmon Market $5.50 $4.50 S1 1 S2 Decrease in input prices (fuel, bait, wages, transportation, etc.) 2 D1 0 800 1000 Supply could shift right due to Increase in the number of (fisherman) sellers. Better fishing Quantity (lbs) Effect of a change in supply, part 2 Price per lb. Salmon Market $6.25 $5.50 Supply could shift left due to Decrease in the number of (fisherman) sellers. S2 S1 Increase in input prices (fuel, bait, wages, transportation, etc.) 2 1 D1 0 670 800 Poor fishing Quantity (lbs) Price per bushel P1 S1 S2 1 In this case, price remains unchanged 2 D1 0 q1 q2 D2 Quantity (bushels) Effect of a change in demand and supply, part 2 Price per bushel P2 P1 S1 1 S2 Now both price and quantity change 2 D1 0 q1 q2 D2 Quantity (bushels) Price per bushel P1 S1 S0 0 1 D0 0 q0 q1 Since the shift backward of D is of the same magnitude as the shift of S, P is unchanged. D1 Quantity (bushels) Price Floors and Ceilings “Legal restrictions on market price” •Price ceiling: The highest price at which it is legal to trade a particular good, service, or factor of production. Examples: Rent controls in NYC; Usury ceilings in Arkansas; ceilings on grain storage fees in Illinois. Price floors: The lowest price at which it is legal to trade a particular good, service, or factor of production Examples: Dept. of Agriculture loan rates for corn, soybeans, cotton, rice, peanuts, . . . ;The minimum wage. The rental housing market in New York City Monthly Rent S If the Rent Control Board sets a ceiling of $900 per month, 3,000 apartmentseekers won’t be able to find one. $1,120 $900 Shortage D 0 4,000 5,700 7,000 Rental Units Does the minimum wage create unemployment? Wage rate (dollars per hour) S Card & Krueger have a different view—see “Eye on the Economy”, p. 105. unemployment $5.15 D 0 3 7 Quantity (thousands of workers) P/BU #2 Hard KC Wheat Surplus A price floor of $3.20 per bushel will produce a surplus of 300 bushels. But what if the floor were set at $2.35? S $3.20 $2.52 D 0 550 700 850 bushels Complete Exercise 2 on p. 108 Price per pair S P1 Start with a graph like this D 0 q1 Pairs (in thousands)