Equilibrium

Equilibrium: Mr. Demand meet Mr. Supply Hmm…this is pretty good body paint, but I’ll still profit…so it’s a deal I have some green body paint to sell. How about $20 Consumers and producers have competing motivations They have to come to an agreement in terms of the price of a good and the quantity sold of the good. This agreement is called equilibrium Well, I happen to need it. How about $15 Great…but I don’t have any pockets so can I pay you later?

Equilibrium I. Equilibrium: the price at which the quantity demanded is equal to the quantity supplied A. Point Where the supply and demand curves intersect

Shifting Equilibrium? II. Shifting Equilibrium: shift in EITHER Demand or Supply, results in a shift the equilibrium point Shifts in Demand Increase = Higher Price/Higher Quantity Decrease = Lower Price Lower Quantity

Increase vs. Decrease

Shift in Supply Shifts in Supply Increase in Supply = Lower Price/Higher Quantity Decrease in Supply = Higher Price/Lower Quantity

Increase vs. Decrease in Supply

Voluntary Exchange Voluntary Exchange- the act of buyers and sellers freely and willingly engaging in market transactions. Moreover, transactions are made in such a way that both the buyer and the seller are better off after the exchange than before it occurred.

Pearl Exchange Simulation Consumer’s Surplus- Any money saved by buying below the buyer’s maximum buying price Producer’s Surplus- Any money that is made by selling above the seller’s minimum selling price It is possible for both the buyer and the seller to “win” in this free market Goal for both buyers and sellers is to make as much surplus as possible

Example of Voluntary Exchange A consumer has a new job which requires a pick-up truck. The maximum the buyer is willing to spend is $20,000. A producer has a pickup truck that they wish to sell for no less than $15,000. The buyer and the seller negotiate and complete the transaction at a price of $18,000. What was the Consumer’s Surplus? What was the Producer’s Surplus?

Example of Negotiation in Voluntary Exchange Voluntary Exchange of Smart Phone Calculate the Producer and Consumer’s Surplus

Pearl Exchange Simulation

The Pearl Exchange There will be four trading sessions. In each session, you can only buy or sell ONCE. When you make a deal, shake hands and come to the board to record your negotiated price. Then go back to your seat and record your surplus in the table. If you do not make a sale or purchase, you take the entire minimum or maximum price for a LOSS. Are you the best negotiator in the class? Let’s find out. Good Luck!

Supply and Demand Analysis Easy as 1, 2, 3 Before the change: Draw supply and demand Label original equilibrium price and quantity The change:   Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease After change:   Label new equilibrium? What happens to Price? What happens to Output (Quantity)?

What if Suppliers Don’t Pick the Right Price? Disequilibrium = market is not in balance leading to negative outcomes - surplus or shortage.

Surplus – Excess Supply But consumers only want this much of whatever at that high price  Surplus – Excess Supply Producers are wanting to supply this much quantity of whatever at a high price  Surplus (excess supply): Located above the equilibrium point Produces are supplying more goods than consumers are demanding - consumers will not buy enough of the product Includes every price above equilibrium point

Surplus-Excess Supply B. Responses of Suppliers i. Reduce Prices Suppliers will cut the price of the good until consumers begin buying it (until the Q supplied= Q demanded = equilibrium) ii. Shift to producing another product Some suppliers will also stop supplying the product and devote their resources to producing another good they think will be in demand Why? Or hey I’ve got a great new idea for another product http://www.youtube.com/watch?feature=player_embedded&v=AZsiOTVLKGI I just can’t believe that prices would be too high for this robotic smoking hat, but I guess I better lower them or I’ll have a surplus

Shortage – Excess Demand Shortage (excess demand): Located below the equilibrium point Demand for the good is higher than the supply – not enough to satisfy all customers Includes every price below Equilibrium price But consumers want this much of whatever at that low price  Suppliers are only supplying this much of whatever at this low price 

If that’s making money, kids will love Prison Gang Legos D. Response of suppliers i. Increase prices Producers will start producing more of the good until the Q supplied = Q demanded = equilibrium ii. More suppliers will enter the market Some suppliers will enter the market to begin producing the items in demand Why? Kids just can’t get enough of airport security Legos series. I think I can increase prices! If that’s making money, kids will love Prison Gang Legos

IV. Interfering with Equilibrium: Price Ceilings and Price Floors

A. Price Ceiling = Gov. sets a max price for a good/service What will happen to the quantity demanded for apartments? What about quantity supplied? With a higher quantity demanded than quantity supply what do we have? Let’s say buyers and sellers reach an equilibrium price of $1400 per month and an equilibrium quantity of 300 units for 2 bedroom apartments A. Price Ceiling = Gov. sets a max price for a good/service “essential products” that could become too expensive Examples: Rent control B. Effects Creates Shortage (excess demand) Lower (maybe little) profit margin for suppliers Suppliers may cut cost of production = lower quality Reduces suppliers incentives to create good products = lower quality Decrease Increase Then the city of Brentwood passes a law stating the max rent for 2 bedroom apts can be $1000

C. Price Floors = Gov. Sets min. price for good/service What will happen to the quantity demanded for wheat? What about quantity supplied? With a higher lower demanded than quantity supply what do we have? Let’s say buyers and sellers reach an equilibrium price of $2.00/lb of wheat and an equilibrium quantity of 30,000lbs. C. Price Floors = Gov. Sets min. price for good/service Gov. has an interest in sellers staying in business Examples: Min. Wage & Agriculture D. Effects Surplus Decrease Increase However, the gov. and sellers say that price is too low for them to stay in business. Considering they need food producers to stay in business to feed the public they set a min. price of $5.00/lb