The Market Equilibrium The Market Equilibrium (Again) Market demand and supply Market demand and supply Bring together suppliers and demanders Bring together suppliers and demanders Equilibrium Equilibrium

Market Demand Is the Sum of All Individual Demands At each price, sum the individual quantities demanded, Da, Db … Dn, to get market quantity demanded (Dm) += Dm = Da + Db +... Dn Db Da Dm

Market Supply Is the Sum of All Individual Suppliers At each price, sum the individual quantities supplied to get market quantity supplied (Sm) Sa Sb Sm = Sa + Sb … Sn + = Sm

Competition Demanders compete with each other to get goods. Demanders compete with each other to get goods. Their efforts push price up, enriching suppliers. Suppliers compete with each other to attract customers. Suppliers compete with each other to attract customers. Their efforts push price down, enriching demanders. Demanders do NOT compete with suppliers, even thought it sometimes seems that way. They are bargaining and cooperating. Demanders do NOT compete with suppliers, even thought it sometimes seems that way. They are bargaining and cooperating. Each party tries to convince the other of the benefit of more for itself.

Equilibrium: Competition means mutually beneficial cooperation At equilibrium no one has an incentive to change behavior: P* Q* Price S D Q/time

Adjustments to equilibrium Price above P* Price above P* Quantity supplied exceeds quantity demanded: excess supply, or surplus Quantity supplied exceeds quantity demanded: excess supply, or surplus Frustrated suppliers compete for business, lowering prices (buyers market) Frustrated suppliers compete for business, lowering prices (buyers market) Price falls until market clears Price falls until market clears Price below P*Price below P* Quantity demanded exceeds quantity supplied: excess demand, or shortage Quantity demanded exceeds quantity supplied: excess demand, or shortage Frustrated demanders compete for product, raising prices (sellers market) Frustrated demanders compete for product, raising prices (sellers market) Price rises until market clears Price rises until market clears

Adjustment process What if the price is NOT right? Competition forces push price toward equilibrium: Excess Supply Excess Demand P high P low Price S D Q/time

Minimum Wage: A Price Floor Legal minimum on wage: Wm Legal minimum on wage: Wm –If greater than W* excess supply of labor excess supply of labor Winners: Winners: –Those who keep their jobs Losers Losers –Firms (& their customers) who pay –Those who lose their jobs S D $ Labor 0 Ld LsL* W* Wm

Data Confirming Theory

Makes 360 burgers an hour customizedno dirty human hands

Rent Controls: A Price Ceiling on Apartment Rent Legal maximum on allowable rent: Legal maximum on allowable rent: Pm less than P* excess demand for space excess demand for space Winners: Winners: –Those who keep apartments Losers Losers –Landlords –Those who cant get in $ S D Quantity0 Qs Q* Qd P* Pm

San Francisco: Hurt by Rent Control (newspaper article) "In San Francisco, one of the toughest places in the country to find a place to live, more than 31,000 housing units one of every 12 now sit vacant, according to recently released census data. Thats the highest vacancy rate in the region, and a 70 percent increase from a decade ago." The reason? The city's rent control laws make it difficult to raise rents or evict a tenant. "Increasingly, small-time landlords are just giving up, like one who has left two large apartments on the second and third floors of her building vacant for more than a decade, after a series of tenant difficulties. Its just not worth the bother, or the risk, of being legally tied to a tenant for decades.

Questions How do each of these events influence the equilibrium How do each of these events influence the equilibrium (i) price of airline tickets and (ii) quantity of airline trips taken 1. Rise in price of jet fuel 2. Depression in the economy 3. Threat of war 4. Government regulations making air travel safer