Equilibrium Where the Consumer and Producer Meet

Market – arrangements where people trade Demand & Supply at center of market Mutually beneficial for demander & suppliers to come together and make exchanges Farmers’ Market

Transaction Costs in Markets The costs of time and information required for exchange Example: Y ou are looking for a summer job. One way is to go from employer to employer looking for openings. Both time consuming and could take extensive travel. A better strategy would be to pick up a couple of local newspapers and read through the help-wanted ads. Adam Smith’s “Invisible Hand” brings these forces together.

Equilibrium is the point at which quantity demanded equals quantity supplied At equilibrium there is no inherent tendency to change

When the demand curve shifts to the right (left), the equilibrium price rises (falls) and the equilibrium quantity rises (falls).

When the Supply Curve shifts to the left (right), the equilibrium price rises (falls) and the equilibrium quantity falls (rises).

Changes in Equilibrium Price/Quantity (con’t) Approach to Analyzing Changes 1. Determine what changes: demand and/or supply 2. What direction is change: increase/decrease 3. Find new equilibrium price/quantity

Examples: Change in Demand What is the initial Price Equilibrium? What is the New Price Equilibrium? What factors (determinants) may have caused this shift?

Example: Change in Supply What is the initial Equilibrium Price/Quantity? What is the New Equilibrium Price/Quantity? Why would the Government get offer subsidies to Universities?

Surplus & Shortage When the Market Won’t Compromise

When the quantity supplied exceeds the quantity demanded What is the amount of surplus at $40?

When there is an excess of quantity demanded compared to quantity supplied What is the amount of shortage?

Thus, a surplus creates downward pressure on the price, and a shortage creates upward pressure on the price Price tends toward Equilibrium

Price Floors & Price Ceilings When the Government Gets Involved

Price Ceilings A legal maximum that can be charged for a good Results in a Shortage Ex. – rent controls, credit card interest rates, oil

Price Floors A legal minimum that can be charged for a good. Results in a Surplus Ex. minimum wage, milk, sugar