Surplus/Shortage, Equilibrium Price and Price Ceilings/Floors ECONOMICS Surplus/Shortage, Equilibrium Price and Price Ceilings/Floors

HOW PRICES ARE DETERMINED Equilibrium Price: Price where demand EQUALS supply Also called “Market Clearing Price” NO SURPLUS OR SHORTAGE

Equilibrium Price Equilibrium Price Price where Qd=Qs P S1 D1 o Q P1 Quantity

HOW PRICES ARE DETERMINED Surplus: When supply is greater than demand To get rid of a surplus, stores lower prices (sales) and produce less.

Surplus Surplus: Qs > Qd (Price Floor) 20 P S1 D1 o Q P2 P1 Price 15 Quantity

HOW PRICES ARE DETERMINED SHORTAGE: Demand is greater than supply Stores respond by raising prices and producing more.

Shortage Shortage: Qd > Qs (Price Ceiling) P S1 D1 o Q P1 P2 Q1 15 20 Quantity

SURPLUS OR SHORTAGE? A very popular singer is coming to town to perform in a concert hall that seats 10,000 people. The ticket price for the concert is $30 per person. There are 30,000 fans in the area who are willing to pay $80 per ticket to attend the concert. What will happen?

SHORTAGE OR SURPLUS? The Ford Motor Company has designed a new car that resembles a Ford model that was popular 40 years ago. Ford plans to produce 100,000 of the new-old cars each year. Ford will price these cars at $24,000. There are 200,000 people per year that want to buy the car. What will happen?

SHORTAGE OR SURPLUS? The Fish and Wildlife Department in California allows people to dig for razor clams on ocean beaches 3 days a year. There is a small charge ($10) for a license to dig these clams. Millions of people enjoy eating razor clams. During most of the year they buy razor clams in fish markets for $20 to $30 per dozen. What will happen on the days people can dig razor clams themselves?

THE PRICE SYSTEM PRICE CEILING: highest price that can be charged for a good. Ex: rent control apartments in NYC Price ceilings result in SHORTAGES if set below market price. See graph

THE PRICE SYSTEM PRICE FLOORS: lowest price that can be paid for a good or service EX. – Minimum Wage: lowest legal wage that can be paid to workers Price Floors result in a SURPLUS if set above market price.