Download Equilibrium Price and Prices

Equilibrium
Where the Consumer and
Producer Meet
Market –
arrangements
where people
trade
Farmers’ Market
• Demand & Supply at center of market
• Mutually beneficial for demander &
suppliers to come together and make
exchanges
Transaction Costs in Markets
• The costs of time and information required for
exchange
• Example: You are looking for a summer job. One way is
to go from employer to employer looking for openings.
Both time consuming and could take extensive travel. A
better strategy would be to pick up a couple of local
newspapers and read through the help-wanted ads.
• Adam Smith’s “Invisible Hand” brings these
forces together.
Equilibrium is the point at which
quantity demanded equals
quantity supplied
• At equilibrium there is no inherent tendency
to change
Equilibrium
Price
60
40
Supply
20
Series2
0
1
2
3
Quantity
4
5
Surplus & Shortage
When the Market Won’t
Compromise
• When the quantity supplied exceeds the
quantity demanded
Surplus
Price
60
Supply
40
Dem and
20
Surplus
0
1
2
3
4
5
Quantity
What is the amount of surplus at $40?
• When there is an excess of quantity
demanded compared to quantity supplied
Shortage
Price
60
Supply
40
Demand
20
Shortage
0
1
2
3
4
5
Quantity
What is the amount of shortage?
Thus, a surplus creates
downward pressure on the price,
and a shortage creates upward
pressure on the price
Price tends toward Equilibrium
When the demand curve shifts to the right
(left), the equilibrium price rises (falls)
and the equilibrium quantity rises (falls).
Price
Equilibrium
80
60
40
20
0
Supply
Demand
Demand Shift
1
2
3
Quantity
4
5
When the Supply Curve shifts to
the left (right), the equilibrium
price rises (falls) and the
equilibrium quantity falls (rises).
Price
Equlibrium
80
60
40
20
0
Supply
Demand
Supply Shift
1
2
3
Quantity
4
5
Changes in Equilibrium
Price/Quantity (con’t)
Approach to Analyzing Changes
1. Determine what changes: demand and/or
supply
2. What direction is change: increase/decrease
3. Find new equilibrium price/quantity
Examples: Change in Demand
Price
Concert Tickets
200
150
100
50
0
Supply
D1
D2
1
2
3
4
5
Quantity
• What is the initial Price Equilibrium?
• What is the New Price Equilibrium?
• What factors (determinants) may have caused this
shift?
Example: Change in Supply
Price
Subsidies to Public Universities
200
150
100
50
0
S1
Demand
S2
1
2
3
4
5
Quantity
• What is the initial Equilibrium Price/Quantity?
• What is the New Equilibrium Price/Quantity?
• Why would the Government get offer subsidies to
Universities?
Price Floors
&
Price Ceilings
When the Government Gets Involved
Price Ceilings
• A legal maximum that can be charged for a
good (this will be BELOW “E”)
• Results in a Shortage
• Ex. – rent controls, credit card interest rates,
oil
Price Floors
• A legal minimum that can be charged for a
good (this will be ABOVE “E”)
• Results in a Surplus
• Ex. minimum wage, milk, sugar