DO NOW!! Imagine the price of gas suddenly fell to 10 cents/gal… What would happen? What would eventually happen the price? 2) Now imagine gas was $10/gal What would happen? How would price be effected?

The Economic Equilibrium How is the market price and quantity decided?

Supply and Demand Separate How much would you buy it for? How much would you sell it for?

Shortage and Surplus  At P= $2, what is Qd? Qs? Qd > Qs = Shortage (P will go up)

Shortage and Surplus  At P= $9, what is Qd? Qs? Qs > Qd = Surplus (P will go down)

The Equilibrium  At what Price does Qd=Qs? What is the equilibrium P and Q?

The Equilibrium $9 $5 $2

Market Efficiencies Productive Efficiency - Produce at the lowest avg. cost Allocative Efficiency - Produce the set of Goods and Services most highly valued by society = Socially Optimal!  where D = S or MB = MC

Moving The Equilibrium Shift in Demand (to the right) What happened to P and Q? What might cause this?

Moving The Equilibrium Shift in Supply (to the right) What happened to P and Q? What might cause this?

Moving The Equilibrium Draw the graph What happens to P and Q? Supply Left Demand Left

Shifting Both Curves… 2 things happening at same time Either P or Q will be unknown (depend on which shift is bigger) Check each effect individually See where they disagree…

Shifting Both Curves… Ex: product is dell computers. Avg. income rises and semiconductors get more expensive… Income up= D up = P up, Q up Semiconductors expensive = S down = P up, Q down P up for both = certain Q differs = unknown!

Price Floors and Ceilings Price Ceiling: legal max. price ex: Rent control, electricity Creates Shortage *Must be below P* to be effective Price Floor: legal min. price ex: minimum wage (labor price) Creates surplus must be above P* to work

Price Floors and Ceilings Graph like this…