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
Chapter 6 Equilibrium Equilibrium • Price at which the quantity demanded equals the quantity supplied. • Intersection of Supply and Demand Curves. • Represents the “market clearing price” because it clears the market of the good or service being sold. All buyers, who were willing to pay this price, were able to buy what they wanted. No one went home empty handed. All sellers, who were offering to sell at this price, were able to sell all that they wanted to sell. They didn’t have anything left over. Equilibrium (continued) • Number of points of equilibrium is always equal to the number of curves on your graph minus 1 (4 curves – 1 = 3 points of equilibrium in our example) • E1 = S1 + D1 • E2 = S1 + D2 or E2 = S2 + D1 • E3 = S2 + D2 Equilibrium (continued) S1 P E1P = P1 E1 E1Q = D1 Q1 Q Equilibrium (continued) S1 P E2 P2 P1 E1P = E1Q = E2P = E2Q = E1 D2 D1 Q1 Q2 Q Equilibrium (continued) S1 P E2 P2 P1 E1P = E1Q = E2P = E2Q = E1 D2 D1 Q1 Q2 Q Equilibrium (continued) S2 P P3 E3 S1 E2 P2 E1 P1 E1P = E1Q = E2P = E2Q = E3P = E3Q = D2 D1 Q3 Q1 Q2 Q Equilibrium (continued) P2 S1 Surplus P E1 P1 D1 Q1 Q If the price is set above equilibrium, a surplus will occur. A surplus is when the quantity supplied is greater than the quantity demanded. The easiest way to eliminate a surplus is to lower the price (have a sale!) The way to calculate the value of the surplus is to find the difference between the quantity supplied and the quantity demanded at that price. (QS – QD) Equilibrium (continued) P P1 P3 If the price is set below equilibrium, a shortage will occur. A shortage is when the quantity demanded is S1 greater than the quantity supplied. A shortage can not be eliminated, but it can be prevented from reoccurring E1 again by raising the price. The way to calculate the value of the shortage is to Shortage D1 find the difference between the quantity demanded and Q1 Q the quantity supplied at that price. (QD – QS) Equilibrium (continued) P P2 P1 Price Floor S1 Surplus E1 Q1 D1 Q Markets will tend toward their natural equilibrium, if left to their own devices. Sometimes, government actions interfere with the market finding its natural equilibrium. The government will set a price floor to protect the producer. The selling price is not allowed to drop below this price (minimum price). This happens with agriculture and their price supports. In order to make sure farmers can make a profit prices are set at a certain level (above the natural equilibrium). However, in many instances, consumers are not willing to pay these higher prices and an artificial surplus will be created. Equilibrium (continued) S1 P P1 P3 E1 Shortage Price Ceiling D1 Q1 Q On the other hand, the government sometimes sets a price ceiling to protect the consumer. Now the selling price is not allowed to rise above this level (maximum price). This happens with rent control. If the rents on affordable apartments in the big cities like New York were higher, many consumers would not be able to afford a home. Because these low rents (below natural equilibrium) prevent landlords from making much of a profit, they do not want to offer a lot of “low rent” apartments, so an artificial shortage occurs. Equilibrium (continued) P P2 P1 P3 Price Floor S1 E1 Price Ceiling Q1 D1 Q Remember, when you are working with Price Floors and Price Ceilings, that the house is upsidedown. If you can remember that, you should not have any problem. It is the opposite from the way we are used to thinking of floors and ceilings.