Today Market Equilibrium How shifts in demand and supply affect the market equilibrium Price floors & price ceilings

The Market for Cheese Two main questions: What will be the price of cheese? How much will be exchanged?

The Equilibrium Condition The Equilibrium Condition: In order for the price and the quantity exchanged to remain unchanged, the QD must equal the QS. Note: If D or S shift, then this will lead to a new equilibrium.

Market Equilibrium, Graph Price ($/lb.) The equilibrium price, where QD = QS, is $3. The equilibrium Q is 200 lbs. S 4 P*=3 2 1 D Quantity (lb.per week) 100 Q*= 200 300 400

Why Equilibrium? Excess demand or shortage: when QD > QS, at a particular price. Excess supply or surplus: when QS > QD, at a particular price. An observation: Excess demand causes P to rise. Excess supply causes P to fall. Equilibrium: No excess demand, no excess supply. Stable price.

Market Equilibrium, Graph Price ($/lb.) What if P=$4? What if P=$2? S 4 P*=3 2 1 D Quantity (lb.per week) 100 Q*= 200 300 400

Market for Sunflower Seeds Price ($/lb.) Where is the initial equ.? What if a new s.s. diet becomes fashionable? S 4 3 2 1 D 100 200 300 400 Quantity(lb.per week)

Sunflower Seed Diet is Fad Price ($/lb.) Why does D shift? What happens to equ. P & Q? Does this make sense? S D 4 3 2 D’ 1 100 200 300 400 Quantity(lb.per week)

Description of Events “The demand for sunflower seeds increased, which pushed up the price of sunflower seeds, increasing the quantity supplied.”

A Closer Look at Adjustment Price ($/lb.) What drives P upward? QD>QS Shortage at P0. Price will rise. S D P0 D’ QS QD Quantity(lb.per week)

A Closer Look at Adjustment Price ($/lb.) As the price rises, QD will fall & QS will rise. Shortage gone at P1. S D P1 P0 D’ QS Q QD Quantity(lb.per week)

Market for Corn What if the price of soybean oil rises? ($/bu.) What if the price of soybean oil rises? Consider changes to both D & S. S D Quantity(bu. per year)

Market for Corn P of soybean oil rises. Why does S shift? Price ($/bu) S’ P of soybean oil rises. Why does S shift? Why does D shift? S D P1 P0 D’ Q1 Q0 Quantity(bushels per year)

Simultaneous Changes in D & S The ultimate effect on equ. P & Q will depend on how much D shifts relative to the shift in S. In our example, price must rise, but quantity exchanged might rise or falls depending on which effect is stronger. Experiment on your own with various combinations of D & S changes!

Price Controls When the gov’t sets a legal min. or max. price. Price Floor: a legal minimum price. (Not allowed to charge less than $___.) Note: If it is set below the equilibrium price, will not affect the market. Said to be “nonbinding”. We focus on binding price floors.

Price Floor QS> QD Surplus created by law. What Q is exchanged? Quantity QS PFloor QD QS> QD Surplus created by law. What Q is exchanged?

Effects of Price Floor With a price floor, there is a surplus. W/O the law, the price would fall, eliminating the surplus.

Minimum Wage Laws Sets a minimum price of labor.

Binding Minimum Wage Laws Firm are demanders of L. Workers are suppliers of L. Wage is price. What do we call a surplus of L? S D WageFloor QD QS Labor Hours

Is the current min. wage law binding? How can you tell?

Binding Minimum Wage Laws Goal: Give lowest-skilled workers an above-market wage. Effects: Those with jobs get higher income. Fewer jobs available, harder to find jobs. Employers may discriminate more easily.

Minimum Wage Effects, Cont’d. Winners Those who keep job (they earn more per hour). Losers Workers who lose their job (or get hours cut). Workers who can’t find work. Employers (pay higher wage, can’t afford as many workers).

Price Ceiling Price Ceiling: a legal maximum price.

Price Ceiling QD> QS Shortage created by law. What Q is exchanged? PCeiling QS QD Quantity

Coming Up: Begin Ch. 18, elasticity

Group Work: Changes in Market Equilibrium For each scenario, address the following: Does demand or supply shift? Which direction does it shift? Draw the new curve on the graph on properly label it. Indicate the new equilibrium price & quantity. Explain what happened in this market in complete sentences.

Market for Clothing There is a recession. Price /item S P0 D Q0 Items per week

Market for strawberries Price ($/lb.) What if the price of cabbage rises? Hint: farmers can plant either one in the same fields. S P0 D Q0 Quantity(lb. Strawb. per week)

Market for Yogurt What if the price of live yogurt cultures falls? ($/tub.) What if the price of live yogurt cultures falls? Hint: Live cultures are needed to make yogurt. S P0 D Q0 Quantity(tubs per week)