Definitions Market Equilibrium: the point at which quantity supplied and quantity demanded for a good or service are equal ● producers and consumers are satisfied ● supply and demand are in balance

Supply and Demand Schedule Price per pair of Shoes Quantity Supplied Quantity Demanded $60.00 4,750 1,500 $50.00 3,750 2,250 $40.00 3,000 $30.00 $20.00

(Pairs of Shoes) Thousands Market Equilibrium P 70 60 50 40 30 20 10 S1 ● A ● E ● B ● D $ ● E1 ● C ● B ● D ● A ● E D1 1 2 3 4 5 (Pairs of Shoes) Thousands Q

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

Definitions Surplus: a situation in which quantity supplied is greater than quantity demanded, resulting in excess supply ● price is too high ● As price falls, quantity supplied decreases and quantity demanded increases until market is in equilibrium

(Pairs of Shoes) Thousands Market Equilibrium P 70 60 50 40 30 20 10 Surplus = 3,250 S1 $ ● E1 D1 1 2 3 4 5 (Pairs of Shoes) Thousands Q

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?

Definitions Shortage: a situation in which quantity demanded is greater than quantity supplied, resulting in excess demand ● price is too low ● As price rises, quantity supplied increases and quantity demanded decreases until market is in equilibrium

Market Equilibrium Price 70 60 50 40 30 20 10 S1 $ ● E1 Shortage = 3,250 D1 1 2 3 4 5 (Pairs of Shoes) Thousands Q

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 

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?

Changes in Market Equilibrium A shift in either supply or demand results in a new market equilibrium Supply Demand

Changes in Market Equilibrium 2. Shift in Demand: change in consumer taste, size of market, income, price of complementary goods, price of substitute goods, and consumer expectations

Increase in Demand P S1 P2 ● E2 ● E1 P1 D1 D2 Q Q1 Q2

Decrease in Demand P S1 ● E1 P1 ● E2 P2 D2 D1 Q Q2 Q1

Changes in Market Equilibrium 3. Shift in Supply: change in the cost of production, technology, government policies, natural disasters, competition, price of related goods, and producer expectations

Decrease in Supply P S2 S1 ● E2 P2 ● E1 P1 D1 Q Q2 Q1

Increase in Supply P S1 S2 ● E1 P1 ● E2 P2 D1 Q Q1 Q2

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 lower demand 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