Download Lecture 5 The Market Equilibrium

The Market Equilibrium
(Again)
■ Market demand and supply
■ Bring together suppliers and demanders
■ Equilibrium
Market Demand Is the Sum of
All Individual Demands
At each price, sum the individual quantities demanded,
Da, Db … Dn, to get market quantity demanded (Dm)
+
Da
=
Db
Dm = ∑ Da +
Db + . . . Dn
Dm
Market Supply Is the Sum of All
Individual Suppliers
At each price, sum the individual quantities supplied to get
market quantity supplied (Sm)
Sm = ∑ Sa + Sb … Sn
Sb
Sa
+
=
Sm
Competition
 Demanders compete with each other to get goods.
Their efforts push price up, enriching suppliers.
 Suppliers compete with each other to attract customers.
Their efforts push price down, enriching demanders.
 Demanders do NOT compete with suppliers, even
thought it sometimes seems that way. They are
bargaining and cooperating.
Each party tries to convince the other of the benefit of
more for itself.
Equilibrium: Competition means
mutually beneficial cooperation
At “equilibrium” no one has an incentive to change behavior:
Price
S
P*
D
Q*
Q/time
Adjustments to equilibrium
■ Price above P*
► Quantity supplied exceeds quantity demanded: excess
supply, or “surplus”
► Frustrated suppliers compete for business, lowering
prices (“buyers’ market”)
► Price falls until market clears
■ Price below P*
► Quantity demanded exceeds quantity supplied: excess
demand, or “shortage”
► Frustrated demanders compete for product, raising
prices (“sellers’ market”)
► Price rises until market clears
Adjustment process
What if the price is NOT right?
■Competition forces push price toward equilibrium:
Price
P high
P low
Excess Supply
Excess Demand
S
D
Q/time
Minimum Wage: A Price Floor



Legal minimum on wage: Wm
– If greater than W*
 excess supply of labor
Winners:
– Those who keep their jobs
Losers
– Firms (& their customers) who pay
– Those who lose their jobs
$
S
Wm
W*
D
0
Ld L* Ls
Labor
Data Confirming Theory
Makes 360 burgers an hour—
customized—no dirty human hands
Rent Controls:
A Price Ceiling on Apartment Rent

Legal maximum on allowable rent:
Pm less than P*


 excess demand for space
Winners:
– Those who keep apartments
Losers
– Landlords
– Those who can’t get in
$
S
P*
Pm
D
0
Qs Q* Qd
Quantity
San Francisco: Hurt by Rent Control
(newspaper article)
"In San Francisco, one of the toughest places in the country to
find a place to live, more than 31,000 housing units — one of
every 12 — now sit vacant, according to recently released
census data. That’s the highest vacancy rate in the region, and
a 70 percent increase from a decade ago."
The reason? The city's rent control laws make it difficult to
raise rents or evict a tenant.
"Increasingly, small-time landlords are just giving up, like one
who has left two large apartments on the second and third
floors of her building vacant for more than a decade, after a
series of tenant difficulties. It’s just not worth the bother, or the
risk, of being legally tied to a tenant for decades.”
Questions

How do each of these events influence
the equilibrium
(i) price of airline tickets and
(ii) quantity of airline trips taken
1. Rise in price of jet fuel
2. Depression in the economy
3. Threat of war
4. Government regulations making air
travel safer