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Download Market Equilibrium Excess Supply Excess Demand
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Market Equilibrium ¾ Supply and Demand curves cross ¾ Quantity supplied equals quantity demanded at a market clearing price S Pe D Qe Excess Supply ¾ The amount the quantity supplied exceeds quantity demanded at a given price S P Pa ES: Qs-Qd Surplus D Qd Q Qs Excess Demand ¾ The amount the quantity demanded exceeds quantity supplied at a given price S P ED: Qd-Qs Shortage Pb D Qs Qd Q 1 1 Excess Supply and Demand Price $10 $20 $30 Qd 22 15 8 Qs 13 15 17 ES -0 9 ED 9 0 -- Policy Analysis ¾ Policy to impact either S or D ¾ What are the objectives? ¾ How does elasticity effect? ¾ What are the impacts? ¾ Winners and losers ¾ Deadweight loss Consumer Surplus ¾ ¾ The difference between what consumers actually paid for a given quantity and the maximum amount the would have paid on an individual basis. Area above equilibrium price and below the demand curve 2 2 Consumer Surplus P Area above equilibrium price and below the demand curve Pe D Q Producer Surplus ¾ ¾ The difference between what producers actually received for a given quantity and the minimum they would have accepted on an individual basis. Area below equilibrium price and above the supply curve Producer Surplus S Pe Area below equilibrium price and above the supply curve Q 3 3 S & D Analysis P S CS Pe PS D Q Qe New Sales Tax P T=Pc-Pp S T Impact CS: -e-f a Pc f P1 d Pp e c PS: -c-d G: +d+f b Net: -c-e D1 Q2 Q1 Q New Sales Tax S P T=Pc-Pp T Impact CS: -e-f a Pc f P1 d Pp e c PS: -c-d G: +d+f b Net: -c-e D1 Q2 Q1 Q 4 4 Impact of Elasticity S P T=Pc-Pp T a Pc P1 Pp b D1 Q2 Q1 Q New Sales Tax P S T=Pc-Pp T a Pc P1 Pp b D Q2 Q1 Q Price controls: Ceiling S P Impact CS: +c-d a Pe c Pc PS: -c-e d Net: -d-e e b D Q1 Qe Q 5 5 Price controls: Floor P S a Impact CS: -c-d Pf c Pe PS: +c-e d Net: -d-e e b D Q1 Q Qe Price controls: Floor P S a Pf c Pe d e b D Q1 Q Qe Price controls P Pf Surplus Pe S Who holds the surplus? How will the shortage be filled? Pc Shortage Qe D Q 6 6 New Technology P S1 Shift S1 to S2 Impact a CS: +b+c+d S2 P1 P2 PS: +f+g-b b e c d g Net: +c+d+f+g f D Q1 Q2 Q Welfare Analysis Summary ¾ Measures impact of intervention ¾ Consumer and producer surplus ¾ Measures changes in both prices and quantities ¾ Impact may shift between consumer and producer or may be lost to society as a deadweight loss 7 7
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