1. Definitions
Market Equilibrium: the point at which quantity supplied and quantity demanded for a good or service are equal
● producers and consumers are satisfied
● supply and demand are in balance

2. Supply and Demand Schedule
Price per pair of Shoes
Quantity Supplied
Quantity Demanded
$60.00
4,750
1,500
$50.00
3,750
2,250
$40.00
3,000
$30.00
$20.00

3. (Pairs of Shoes) Thousands
Market Equilibrium P 70 60 50 40 30 20 10 S1
● A
● E
● B
● D $
● E1
● C
● B
● D
● A
● E D1
(Pairs of Shoes) Thousands Q

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

5. Definitions
Surplus: a situation in which quantity supplied is greater than quantity demanded, resulting in excess supply
● price is too high
● As price falls, quantity supplied decreases and quantity demanded increases until market is in equilibrium

6. (Pairs of Shoes) Thousands
Market Equilibrium P 70 60 50 40 30 20 10
Surplus = 3,250 S1 $
● E1 D1
(Pairs of Shoes) Thousands Q

7. 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

8. 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?

9. Definitions Shortage: a situation in which quantity
demanded is greater than quantity supplied,
resulting in excess demand
● price is too low
● As price rises, quantity supplied increases and quantity demanded decreases until market is in equilibrium

10. Market Equilibrium Price70 60 50 40 30 20 10 S1 $
● E1
Shortage = 3,250 D1
(Pairs of Shoes) Thousands Q

11. 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 

12. 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?

13. Changes in Market Equilibrium
A shift in either supply or demand results in a new market equilibrium
Supply
Demand

14. Changes in Market Equilibrium
2. Shift in Demand: change in consumer taste, size of market, income, price of complementary goods, price of substitute goods, and consumer expectations

15. Increase in Demand P S1 P2
● E2
● E1 P1 D1 D2 Q Q1 Q2

16. Decrease in Demand P S1
● E1 P1
● E2 P2 D2 D1 Q Q2 Q1

17. Changes in Market Equilibrium
3. Shift in Supply: change in the cost of production, technology, government policies, natural disasters, competition, price of related goods, and producer expectations

18. Decrease in Supply P S2 S1
● E2 P2
● E1 P1 D1 Q Q2 Q1

19. Increase in Supply P S1 S2
● E1 P1
● E2 P2 D1 Q Q1 Q2

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

21. 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

22. 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 lower demand 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