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Equilibrium
• The point where quantity demanded and quantity
supplied come together is known as equilibrium.
• It is the point of balance between price and quantity
where the market for a good is stable.
• If the market price or quantity is anywhere but
equilibrium, the market is in a state that economists
call disequilibrium.
Chapter 6
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Balancing the Market
Graphical Representation of Equilibrium
Finding Equilibrium
Equilibrium Point
Combined Supply and Demand Schedule
$3.50
$2.50
$2.00
Equilibrium
Price
$1.50
$1.00
$.50
Supply
0
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50
a
Equilibrium
Quantity
Price per slice
$3.00
Demand
100 150 200 250 300
Slices of pizza per day
Section
Price of
a slice
of pizza
Quantity
demanded
Quantity
supplied
$ .50
300
100
$1.00
250
150
$1.50
200
200
$2.00
150
250
$2.50
100
300
$3.00
50
350
350
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Result
Shortage from
excess demand
Equilibrium
Surplus from
excess supply
Market Disequilibrium
There are two causes for disequilibrium:
Excess Demand (Shortage) Excess Supply (Surplus)
• Quantity demanded >
than quantity supplied.
• Quantity supplied >
quantity demanded.
Buyers and sellers will always
push the market back towards
equilibrium.
Chapter 6
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Shifts in Supply
• Advances in New Technology
• Input Costs
• Govt. Regulations/Taxes/Subsidies
• Futute Expectations in Price
• Global Economy
• Shifts in Supply Cause the market to find a new
equilibrium point
Chapter 6
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Shifts in Demand
• Change in Income
• Consumer Expectations
• Change in Population
• Trends/Fads
• Price of Related Goods
• Shifts in Demand cause the market to find a
new equilibrium point.
Chapter 6
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Analyzing Shifts in Supply and Demand
Graph A: A Change in Supply
Graph B: A Change in Demand
$800
$60
a
Supply
$50
b
Original
supply
$40
c
Price
Price
$600
$400
c
$30
a
b
$20
$200
New
supply
Demand
New
demand
Original
demand
$10
0
1
2
3
4
5
0
100
Output (in millions)
200
300
400
500
600
700
800
Output (in thousands)
• Graph A shows how the market finds a new equilibrium
when there is an increase in supply. Ex. New Technology
• Graph B shows how the market finds a new equilibrium
when there is an increase in demand. Ex. Tastes &
Preferences
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900
Cell Phones
• Shifts in Supply -
Chapter 6
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“Tickle Me Elmo”
• The toy was introduced in the United States in 1996, quickly
becoming a fad. Some parents literally fought other parents in
stores to purchase one for Christmas. The dolls' short supply due
to the unexpected demand led stores to increase their price
drastically. Newspaper classifieds sold the plush toy for hundreds
of dollars. People reported that the toy, originally sold for $28.99,
fetched as much as $1500.
Chapter 6
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Price Ceilings
In some cases the government steps in to
control prices.
A price ceiling is a maximum price that can be legally
charged for a good - results in a shortage.
When soldiers returned from World War II and started families (which
increased demand for apartments), but stopped receiving military pay,
many could not deal with the jumping rent. The government put in price
controls, so soldiers and their families could pay the rent and keep their
homes. However, this increased the quantity demanded for apartments
and lowered the quantity supplied, meaning that available apartments
were rapidly taken until none were left.
Ex. Rent Control
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Price Floors
• A price floor is a minimum price, set by
the government, that must be paid for a
good or service – results in a surplus.
Ex. Minimum Wage
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The Role of Prices
• What role do prices play in a free market system?
• What advantages do prices offer?
• How do prices allow for efficient resource allocation?
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The Role of Prices in a Free Market
• Prices serve a vital role in a free market economy.
• Prices help move land, labor, and capital into the hands
of producers, and finished goods in to the hands of
buyers.
• Prices create efficient resource allocation for
producers and a language that both consumers and
producers can use.
Chapter 6
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Advantages of Prices
Prices provide a language for buyers and sellers.
1. Prices as an Incentive
Communicate to both buyers and sellers whether goods or services are scarce
or easily available.
2. Signals
High price - producers need to make more. Low price – producers need to
make less.
3. Flexibility
4. Price System is "Free“
•http://www.youtube.com/watch?v=ROcI2
jQH5y0&feature=results_video&playnext
=1&list=PL7A63123C2AE0F722
Chapter 6
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Efficient Resource Allocation
• Resource Allocation
– A market system, with its fully changing prices, ensures that
resources go to the uses that consumers value most highly.
• Market Problems
– Imperfect competition
– Spillover costs, or externalities, are costs of production, such
as air and water pollution, that “spill over” onto people.
– If buyers and sellers have imperfect information on a product,
they may not make the best purchasing or selling decision.
Chapter 6
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