Equilibrium The point where quantity demanded and quantity supplied come together is known as equilibrium. It is the point of balance between price and quantity where the market for a good is stable. If the market price or quantity is anywhere but equilibrium, the market is in a state that economists call disequilibrium.

Graphical Representation of Equilibrium Balancing the Market Graphical Representation of Equilibrium Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 50 150 200 250 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.00 250 150 Shortage from excess demand $1.50 200 Equilibrium Equilibrium Price a Equilibrium Quantity

Market Disequilibrium There are two causes for disequilibrium: Excess Demand (Shortage) Quantity demanded > than quantity supplied. Excess Supply (Surplus) Quantity supplied > quantity demanded. Buyers and sellers will always push the market back towards equilibrium.

Shifts in Supply Advances in New Technology Input Costs Govt. Regulations/Taxes/Subsidies Futute Expectations in Price Global Economy Shifts in Supply Cause the market to find a new equilibrium point

Shifts in Demand Change in Income Consumer Expectations Change in Population Trends/Fads Price of Related Goods Shifts in Demand cause the market to find a new equilibrium point.

Analyzing Shifts in Supply and Demand $800 $600 $400 $200 Price Output (in millions) Graph A: A Change in Supply 1 2 3 4 5 Graph B: A Change in Demand Output (in thousands) $60 $50 $40 $30 $20 $10 900 800 700 600 500 400 300 200 100 Price Original supply Demand a New demand c b New supply b c Supply Original demand a Graph A shows how the market finds a new equilibrium when there is an increase in supply. Ex. New Technology Graph B shows how the market finds a new equilibrium when there is an increase in demand. Ex. Tastes & Preferences

Cell Phones Shifts in Supply -

“Tickle Me Elmo” The toy was introduced in the United States in 1996, quickly becoming a fad. Some parents literally fought other parents in stores to purchase one for Christmas. The dolls' short supply due to the unexpected demand led stores to increase their price drastically. Newspaper classifieds sold the plush toy for hundreds of dollars. People reported that the toy, originally sold for $28.99, fetched as much as $1500.

In some cases the government steps in to control prices. Price Ceilings In some cases the government steps in to control prices. A price ceiling is a maximum price that can be legally charged for a good - results in a shortage. When soldiers returned from World War II and started families (which increased demand for apartments), but stopped receiving military pay, many could not deal with the jumping rent. The government put in price controls, so soldiers and their families could pay the rent and keep their homes. However, this increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none were left. Ex. Rent Control

Price Floors A price floor is a minimum price, set by the government, that must be paid for a good or service – results in a surplus. Ex. Minimum Wage

The Role of Prices What role do prices play in a free market system? What advantages do prices offer? How do prices allow for efficient resource allocation?

The Role of Prices in a Free Market Prices serve a vital role in a free market economy. Prices help move land, labor, and capital into the hands of producers, and finished goods in to the hands of buyers. Prices create efficient resource allocation for producers and a language that both consumers and producers can use.

Prices provide a language for buyers and sellers. Advantages of Prices Prices provide a language for buyers and sellers. 1. Prices as an Incentive Communicate to both buyers and sellers whether goods or services are scarce or easily available. 2. Signals High price - producers need to make more. Low price – producers need to make less. 3. Flexibility 4. Price System is "Free“ http://www.youtube.com/watch?v=ROcI2jQH5y0&feature=results_video&playnext=1&list=PL7A63123C2AE0F722

Efficient Resource Allocation A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly. Market Problems Imperfect competition Spillover costs, or externalities, are costs of production, such as air and water pollution, that “spill over” onto people. If buyers and sellers have imperfect information on a product, they may not make the best purchasing or selling decision.