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Equilibrium Chapter 6 Balancing the Market When quantity demanded = quantity supplied Equal at only one price and one 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 50 a Equilibrium Quantity Price per slice $3.00 Deman d 100 150 200 250 300 Slices of pizza per day 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 Result Shortage from excess demand Equilibrium Surplus from excess supply Reaching Equilibrium Increase in Demand Widgets S1 Price E1 P1 D1 0 QE1 Quantity Reaching Equilibrium Increase in Demand No equilibrium at current price QS < QD resulting in a shortage Widgets S1 Price At this price point, quantity demanded E1 P1 At this price point, quantity supplied D2 D1 0 QE1 shortage QD Quantity Reaching Equilibrium Increase in Demand Right shift of demand results in a higher price and an increase in quantity demanded and quantity supplied from the original. Price Widgets S1 P2 E2 Market forces between supply and demand will cause the price to increase until equilibrium is achieved. P1 D2 D1 0 QE1 QE2 Quantity Reaching Equilibrium Decrease in Demand Widgets S1 Price E1 P1 D1 0 QE1 Quantity Reaching Equilibrium Decrease in Demand Widgets Price No equilibrium at the current price QD < QS resulting in surplus S1 E1 P1 At this price point, quantity supplied At this price point, quantity demanded D2 0 QD surplus QE1 D1 Quantity Reaching Equilibrium Decrease in Demand The left shift of demand results in a lower price and a decrease in the quantity demanded and quantity supplied. Price Widgets S1 E1 P1 P2 E2 D2 0 QE2 QE1 Market forces between between demand and supply will cause price to decrease for a new equilibrium. D1 Quantity Reaching Equilibrium Increase in Supply Widgets S1 Price D1 E1 P1 0 QE1 Quantity Reaching Equilibrium Increase in Supply No equilibrium at the current price QD < QS Widgets S1 Price S2 (1) D1 E1 P1 At this price point, quantity supplied At this price point, quantity demanded (1) 0 QE1 surplus QS Quantity Reaching Equilibrium Increase in Supply Right shift of supply causes a decrease in price and a decrease in the quantity demanded and quantity supplied Price Widgets S1 S2 D1 E1 P1 E2 P2 0 QE1 QE2 Market forces between between demand and supply will cause price to decrease for a new equilibrium. Quantity Reaching Equilibrium Decrease in Supply Widgets S1 D1 Price E1 P1 0 QE1 Quantity Reaching Equilibrium Decrease in Supply No equilibrium at the current price QS < Q D Widgets S2 D1 Price S1 (1) At this price point, quantity supplied E1 P1 At this price point, quantity demanded (1) 0 QS Shortage QE1 Quantity Reaching Equilibrium Decrease in Supply Left shift of supply results in a higher price and a decrease in the quantity demanded and quantity supplied. Price P2 Widgets D1 S2 E2 E1 P1 Market forces between between demand and supply will cause price to increase for a new equilibrium. S1 0 QE2 QE1 Quantity Government Interventions As long as the government intervenes in the market to set price, equilibrium cannot be reached. Price ceiling A maximum price that can be legally charged for a good. Price floor A minimum price for a good or service. Price Ceiling Widgets S1 D1 Price E Pe 0 QE Quantity Price Ceiling Government induced shortage Widgets S1 D1 Price E PE P1 0 QS QE Shortage QD Quantity Example: Rent Control Households cannot afford housing It is to society’s advantage to provide low cost housing Keeps people off of the street Lower crime rate Better education Better health Less cost to society in the long run Problems With Rent Control With rent control Landlords cut costs Poorly maintained buildings Low supply Without rent control More selection Poor are priced out of market Price Floor Widgets D1 S1 Price E Pe 0 QE Quantity Price Floor Government induced surplus Widgets D1 S1 surplus Price P1 E Pe 0 QD QE QS Quantity Minimum Wage People cannot afford necessities at equilibrium wage Government sets minimum wage Labor supplied by households Labor demanded by firms Causes a surplus of labor = unemployment Rising production costs cause shift left of supply Price Floor Labor D1 Wages Example: Minimum wage S1 unemployment W1 E We 0 QD QE QS Quantity Role of Prices - Advantages Price as an incentive Prices as signals High price tells producers the product is in demand Low price gives consumers lower opportunity cost and tells them to buy now Flexibility Prices are more flexible than output Can take care of excess demand or excess supply Price system is “free” market concept Role of Prices - Advantages Wider choice of goods Generally efficient allocation of resources Supports profit incentive Adam Smith theories and Wealth of Nations WWII Rationing and shortages Black market sales increased Role of Prices - Problems Imperfect competition When only one producer sells a good, this producer will charge a higher price than if there was competition between several companies.
