Equilibrium Economics Mr. Bordelon

Price of a slice of pizza Combined Supply and Demand Schedule Balancing the Market The point at which quantity demanded and quantity supplied come together is known as equilibrium. Price per slice Equilibrium Point Finding Equilibrium Price of a slice of pizza Quantity demanded Quantity supplied Result Combined Supply and Demand Schedule $ .50 300 100 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $.50 Slices of pizza per day 50 150 200 250 350 Supply Demand $2.00 $2.50 $3.00 150 100 50 250 300 350 Surplus from excess supply $1.00 250 150 Shortage from excess demand $1.50 200 Equilibrium Equilibrium Price a Equilibrium Quantity

Why is equilibrium important? Equilibrium is the place where supply and demand meet. Awesome, so what? Equilibrium is the MARKET PRICE! Buyers are buying the good they want to buy at the price they want to buy it for. Sellers are selling the good they want to sell at the price they want to sell it for.

What happens when we’re not at equilibrium? Disequilibrium. Where the market price or quantity supplied is anywhere but at the equilibrium/market price. Excess demand. When quantity demanded is more than quantity supplied. Excess supply. When quantity supplied is more than quantity demanded.

Excess Demand

Excess Demand When you have excess demand, you automatically have a shortage. How do we eliminate this shortage?

Excess Demand When you have excess demand, you automatically have a shortage. Shortages are eliminated by raising the price. Interactions between buyers and sellers will always push the market back towards equilibrium.

Excess Supply

Excess Supply When you have excess supply, you automatically have a surplus. How do we eliminate this surplus?

Excess Supply When you have excess supply, you automatically have a surplus. Surpluses are eliminated by lowering prices. Interactions between buyers and sellers will always push the market back towards equilibrium.

Repeat After Me I look down at the ceiling and look up to the floor.

Price Ceilings

Price Ceilings Price ceiling. A maximum price that can be legally charged for a good. Example—rent control. Where a government sets a maximum amount that can be charged for rent in an area.

Price Ceilings—Rent Control

Price Floors Price floor. A minimum price set by the government that must be paid for a good or service. Example—minimum wage. A minimum price that an employer can pay a worker for an hour of labor.

Price Floors—Minimum Wage

Price Floors—Minimum Wage $5.15

Questions 1. Equilibrium in a market means which of the following? (a) the point at which quantity supplied and quantity demanded are the same (b) the point at which unsold goods begin to pile up (c) the point at which suppliers begin to reduce prices (d) the point at which prices fall below the cost of production 2. The government’s price floor on low wages is called the (a) market equilibrium (b) base wage rate (c) minimum wage (d) employment guarantee

Questions 1. Equilibrium in a market means which of the following? (a) the point at which quantity supplied and quantity demanded are the same (b) the point at which unsold goods begin to pile up (c) the point at which suppliers begin to reduce prices (d) the point at which prices fall below the cost of production 2. The government’s price floor on low wages is called the (a) market equilibrium (b) base wage rate (c) minimum wage (d) employment guarantee

Changes in Market Equilibrium Decrease in Supply

Changes in Market Equilibrium Increase in Supply New Supply C B

Changes in Market Equilibrium Decrease in Demand

Changes in Market Equilibrium Increase in Demand New Demand

Changes in Market Equilibrium Do surplus and supply have anything to do with getting to equilibrium?

Questions 1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a (a) lower market price and a higher quantity sold. (b) higher market price and a higher quantity sold. (c) lower market price and a lower quantity sold. (d) higher market price and a lower quantity sold. 2. What happens when any market is in disequilibrium and prices are flexible? (a) market forces push toward equilibrium (b) sellers waste their resources (c) excess demand is created (d) unsold perishable goods are thrown out

Questions 1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a (a) lower market price and a higher quantity sold. (b) higher market price and a higher quantity sold. (c) lower market price and a lower quantity sold. (d) higher market price and a lower quantity sold. 2. What happens when any market is in disequilibrium and prices are flexible? (a) market forces push toward equilibrium (b) sellers waste their resources (c) excess demand is created (d) unsold perishable goods are thrown out

Prices Prices help move land, labor, and capital into the hands of producers, and finished goods in to the hands of buyers. How? Hint: What do prices tell you about? Prices create efficient resource allocation for producers and a language that both consumers and producers can use. How? Hint: Think of the laws of supply and demand.

Prices—Advantages Incentive. Prices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production. Signals. A relatively high price is a signal to producers to make more. A relatively low price is a signal to producers to make less. Flexibility. Prices can be much more flexible than production levels for most products. They can be easily increased or decreased to solve problems of excess supply or excess demand. Price System is “Free”. Unlike central planning, a distribution system based on prices costs nothing to administer.

Prices—Resource Allocation Resource Allocation. A market system, with its fully changing prices, ensures that resources go to the uses that consumers value most highly. In other words, it’s efficient! In other words, resources don’t go to waste! And this is good! Hooray!

Pricing Problems Supply shock. A sudden shortage of a good. Creates a problem of excess demand because suppliers can no longer meet the needs of consumers. The immediate problem is how to divide the available supply among consumers. Rationing. Dividing up goods and services using something other than price. Expensive and difficult to organize. Black market. When people conduct business without regard for government controls on price or quantity. Black markets allow consumers to pay more so they can buy a good when rationing makes it otherwise unavailable. Illegal. Bad. Spillover costs/externalities. Deals with problems associated with the costs of production. Air and water pollution. Extra costs are paid by the consumer.

Questions 1. What prompts efficient resource allocation in a well-functioning market system? (a) businesses working to earn a profit (b) government regulation (c) the need for fair allocation of resources (d) the need to buy goods regardless of price 2. How do price changes affect equilibrium? (a) Price changes assist the centrally planned economy. (b) Price changes serve as a tool for distributing goods and services. (c) Price changes limit all markets to people who have the most money. (d) Price changes prevent inflation or deflation from affecting the supply of goods.

Questions 1. What prompts efficient resource allocation in a well-functioning market system? (a) businesses working to earn a profit (b) government regulation (c) the need for fair allocation of resources (d) the need to buy goods regardless of price 2. How do price changes affect equilibrium? (a) Price changes assist the centrally planned economy. (b) Price changes serve as a tool for distributing goods and services. (c) Price changes limit all markets to people who have the most money. (d) Price changes prevent inflation or deflation from affecting the supply of goods.