1. Equilibrium

2. Equilibrium: Mr. Demand meet Mr. Supply
Hmm…this is pretty good body paint, but I’ll still profit…so it’s a deal
I have some green body paint to sell. How about $20
Consumers and producers have competing motivations
They have to come to an agreement in terms of the price of a good and the quantity sold of the good.
This agreement is called equilibrium
Well, I happen to need it. How about $15
Great…but I don’t have any pockets so can I pay you later?

3. Equilibrium
I. Equilibrium: the price at which the quantity demanded is equal to the quantity supplied
A. Point Where the supply and demand curves intersect

4. Shifting Equilibrium?
II. Shifting Equilibrium: shift in EITHER Demand or Supply, results in a shift the equilibrium point
Shifts in Demand
Increase = Higher Price/Higher Quantity
Decrease = Lower Price Lower Quantity

5. Increase vs. Decrease

6. Shift in Supply Shifts in Supply
Increase in Supply = Lower Price/Higher Quantity
Decrease in Supply = Higher Price/Lower Quantity

7. Increase vs. Decrease in Supply

8. Voluntary Exchange
Voluntary Exchange- the act of buyers and sellers freely and willingly engaging in market transactions.
Moreover, transactions are made in such a way that both the buyer and the seller are better off after the exchange than before it occurred.

9. Pearl Exchange Simulation
Consumer’s Surplus- Any money saved by buying below the buyer’s maximum buying price
Producer’s Surplus- Any money that is made by selling above the seller’s minimum selling price
It is possible for both the buyer and the seller to “win” in this free market
Goal for both buyers and sellers is to make as much surplus as possible

10. Example of Voluntary Exchange
A consumer has a new job which requires a pick-up truck. The maximum the buyer is willing to spend is $20,000.
A producer has a pickup truck that they wish to sell for no less than $15,000.
The buyer and the seller negotiate and complete the transaction at a price of $18,000.
What was the Consumer’s Surplus?
What was the Producer’s Surplus?

11. Example of Negotiation in Voluntary Exchange
Voluntary Exchange of Smart Phone
Calculate the Producer and Consumer’s Surplus

12. Pearl Exchange Simulation

13. The Pearl Exchange There will be four trading sessions.
In each session, you can only buy or sell ONCE.
When you make a deal, shake hands and come to the board to record your negotiated price. Then go back to your seat and record your surplus in the table.
If you do not make a sale or purchase, you take the entire minimum or maximum price for a LOSS.
Are you the best negotiator in the class? Let’s find out. Good Luck!

14. Supply and Demand Analysis
Easy as 1, 2, 3
Before the change:
Draw supply and demand
Label original equilibrium price and quantity
The change:  
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
After change:  
Label new equilibrium?
What happens to Price?
What happens to Output (Quantity)?

18. What if Suppliers Don’t Pick the Right Price?
Disequilibrium = market is not in balance leading to negative outcomes - surplus or shortage.

19. Surplus – Excess Supply
But consumers only want this much of whatever at that high price 
Surplus – Excess Supply
Producers are wanting to supply this much quantity of whatever at a high price 
Surplus (excess supply): Located above the equilibrium point
Produces are supplying more goods than consumers are demanding - consumers will not buy enough of the product
Includes every price above equilibrium point

20. Surplus-Excess Supply
B. Responses of Suppliers
i. Reduce Prices
Suppliers will cut the price of the good until
consumers begin buying it (until the Q supplied= Q demanded = equilibrium)
ii. Shift to producing another product
Some suppliers will also stop supplying the
product and devote their resources to
producing another good they think will be in
demand
Why?
Or hey I’ve got a great new idea for another product
I just can’t believe that prices would be too high for this robotic smoking hat, but I guess I better lower them or I’ll have a surplus

21. Shortage – Excess Demand
Shortage (excess demand): Located below the equilibrium point
Demand for the good is higher than the supply – not enough to satisfy all customers
Includes every price below Equilibrium price
But consumers want this much of whatever at that low price 
Suppliers are only supplying this much of whatever at this low price 

22. If that’s making money, kids will love Prison Gang Legos
D. Response of suppliers
i. Increase prices
Producers will start producing more of the
good until the Q supplied = Q demanded =
equilibrium
ii. More suppliers will enter the market
Some suppliers will enter the market to begin producing the items in demand
Why?
Kids just can’t get enough of airport security Legos series. I think I can increase prices!
If that’s making money, kids will love Prison Gang Legos

23. IV. Interfering with Equilibrium: Price Ceilings and Price Floors

24. A. Price Ceiling = Gov. sets a max price for a good/service
What will happen to the quantity demanded for apartments?
What about quantity supplied?
With a higher quantity demanded than quantity supply what do we have?
Let’s say buyers and sellers reach an equilibrium price of $1400 per month and an equilibrium quantity of 300 units for 2 bedroom apartments
A. Price Ceiling = Gov. sets a max price for a good/service
“essential products” that could become too expensive
Examples: Rent control
B. Effects
Creates Shortage (excess demand)
Lower (maybe little) profit margin for suppliers
Suppliers may cut cost of production = lower quality
Reduces suppliers incentives to create good products = lower quality
Decrease
Increase
Then the city of Brentwood passes a law stating the max rent for 2 bedroom apts can be $1000

25. C. Price Floors = Gov. Sets min. price for good/service
What will happen to the quantity demanded for wheat?
What about quantity supplied?
With a higher lower demanded than quantity supply what do we have?
Let’s say buyers and sellers reach an equilibrium price of $2.00/lb of wheat and an equilibrium quantity of 30,000lbs.
C. Price Floors = Gov. Sets min. price for good/service
Gov. has an interest in sellers staying in business
Examples: Min. Wage & Agriculture
D. Effects
Surplus
Decrease
Increase
However, the gov. and sellers say that price is too low for them to stay in business. Considering they need food producers to stay in business to feed the public they set a min. price of $5.00/lb