1. Additional Lecture Notes 1.Equilibrium 2.Price Floors 3.Price Ceilings 4.Price Elasticity of Demand

2. SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

3. SUPPLY AND DEMAND TOGETHER Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

4. At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

5. The Equilibrium of Supply and Demand Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

6. Equilibrium Surplus When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

7. Markets Not in Equilibrium Price of Ice-Cream Cone 0 Supply Demand (a) Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $2.50 10 2.00 7

8. Equilibrium Shortage When price the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

9. Markets Not in Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand (b) Excess Demand Quantity supplied Quantity demanded 1.50 10 $2.00 7 4 Shortage

10. Equilibrium Law of supply and demand The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

11. Three Steps to Analyzing Changes in Equilibrium Shifts in Curves versus Movements along Curves A shift in the supply curve is called a change in supply. A movement along a fixed supply curve is called a change in quantity supplied. A shift in the demand curve is called a change in demand. A movement along a fixed demand curve is called a change in quantity demanded.

12. Price Ceilings When a price ceiling is set, a shortage occurs. For the price that the ceiling is set at, there is more demand than there is at the equilibrium price. Rent control

13. Price Floors A price floor is the lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. Minimum Wage There is less quantity demanded than quantity supplied.This creates a surplus.

14. Price Elasticity of Demand Price Elasticity of Demand: the measure of how much quantity demanded changes relative to price change. Long-run demand is usually more elastic than short-run demand. % change is less 1 = inelastic % change is 1 or more = elastic

15. Price Elasticity and the Total Revenue Test Price Effect: a change in the amount the seller receives for each unit sold. Quantity Effect: a change in total revenue from raising or lowering prices as determined by quantity demanded.