Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
10 3. Equilibrium Price and Quantity Question: 1. Define the equilibrium price and quantity of a consumer good and describe a process that causes the price to adjust to equilibrium. 2. Define the equilibrium wage and quantity of labor and describe a process that causes the wage to adjust to equilibrium. Diagrams and Problems: 3. Given supply and demand functions, illustrate with spreadsheets, algebra, and diagrams. Illustrate an economy that has only one type of labor and one type of consumer good with a circular flow. Equilibrium Price for a Consumer Good Hint: Never say "demand" in place of "quantity demanded" or "supply" in place of "quantity supplied." The equilibrium price is the price where the quantity demanded is equal to the quantity supplied for a particular good or service. That implies that the equilibrium quantity is both the quantity supplied and the quantity demanded. The equilibrium price and quantity is the only price and quantity were the planned actions of the buyers are consistent with the planned actions of the sellers. At any other price and quantity some or all of either the buyers or the sellers must be frustrated, and unable to complete planned purchases or sales. If price is greater than equilibrium price, quantity supplied is greater than quantity demanded. Some sellers are frustrated because they sell less than planned. They shave their ask prices to try to increase sales. As all sellers gradually cut prices, quantity demanded increases and quantity supplied decreases. Eventually, price and quantity are equal to equilibrium price and quantity. If price is less than equilibrium price, quantity supplied is less than quantity demanded. Some buyers are frustrated because they buy less than planned. Sellers increase prices knowing that they can still sell all they produce. As all sellers gradually increase prices, quantity demanded decreases and quantity supplied increases. Eventually, price and quantity are equal to equilibrium price and quantity. The equilibrium price can be found using algebra by setting the demand and supply functions equal to one another and solving for the price. Qd = Qs 2000k – 100k P = -500k + 400k P 2000k – 100k P + 500k = -500k +400k P + 500k 2500k –100k P + 100k P = 400k P + 100k P 2500k = 500k P 2500k/500k = 500k P/ 500k (the “k”s cancel) 5 = P Pe = 5 <-- this is $5 per unit. The equilibrium quantity can be found using algebra by substituting the equilibrium price into either the demand or the supply function. The result must be same--assuming the equilibrium price is used. Qd = 2000k – 100k P = 2000k – 100k (5) Qs = -500k + 400k P = -500k + 400k (5) 11 = 2000k –500k = 1500k Qe = 1500k = -500k + = 1500k 2000k <-- this is 1500 thousand units -- 1,500,000 The equilibrium price and quantity can be illustrated using a supply and demand diagram. Generally, these are not drawn to scale. If you are asked to draw one using paper and pencil, it should look something like the one below: P S P – Price Q- Quantity 5 Pe D Qe 1500k Q Equilibrium Wage The equilibrium wage is the wage where the quantity of labor demanded is equal to the quantity of labor supplied for a specific type of labor. The equilibrium quantity of labor is both the quantity supplied and the quantity demanded. The equilibrium wage is the only wage where the plans of firms to hire workers is just matched by the plans of workers to obtain employment. At any other wage, either the firms or workers are frustrated. If the wage is below equilibrium, quantity supplied is less than quantity demanded. Some firms cannot find enough suitable employees. Each firm offers higher wages to attract worker. As all firms gradually increase wages, the quantity demanded decreases and the quantity supplied increases. Eventually the wage and quantity of labor employed is equal to the equilibrium wage and quantity of labor. If the wage is above equilibrium, quantity supplied is greater than quantity demanded. Some workers can not find employment. Each firm can offer lower wages and still find enough workers. As all firms gradually decrease wages, the quantity demanded increases and the quantity supplied decreases. Eventually the wage and quantity of labor is equal the equilibrium wage and quantity of labor. The equilibrium wage can be calculated using algebra. First set the supply and demand functions equal and solve for the wage rate. Ld = Ls 1250m – 50m W = -50m + 80m W 1250m – 50m W + 50m = -50m + 80m W + 50m 1300b - 50b W = 80b W 1300m – 50m W + 50m W = 80m W + 50m W 1300m = 130m W 1300m/130m = 130m W/130m 10 = W We = 10 Now, substitute the equilibrium wage into the supply or demand function and 12 solve for labor. Ld = = = = 1250m – 50m W 1250m – 50m (10) 1250m – 500m 750m Ls = -50m + 80m W = -50m + 80m (10) = -50m + 800m = 750m This equilibrium can be illustrated using a supply and demand for labor diagram. Generally, these are drawn on paper and pencil like the one below: S W W – Wage L- Labor 10 We D Le 750b 13