1. Market Equilibrium Lecture 6
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
September 7, 2017 1

2. Announcements: MACRO Fall 2017
MEL Stuff:
Second graded MEL quiz due Tuesday September 12. See MEL!
Exam Stuff:
Sign up Registration for Prelim 1 Cornell created evening prelim conflicts is up on Blackboard. See LHS. Will post one for Prelim 2 soon.
Make-Up Final Exam will be on Monday December 11 at 2pm. It will only be for people who qualify under Cornell’s guidelines OR for people who come and see me in person with extremely compelling reasons. Note that I am very very tough on this. Papers that are due at the end of the term do not count as extremely compelling since you know they are due and have plenty of time to get them done. So don’t procrastinate! Also make sure you carefully read Cornell’s guidelines – many people seem to misinterpret them. Cornell expects you to be able to take 2 exams on the same day. But not, “more than two exams in twenty-four hours”.
See:
Very Interesting Read
Many Thanks Abigail!
In Defense of the Dismal Science… “Economists have gotten a bad rap in recent years, but their devotion to data still offers the most practical, bias-free way to assess our most pressing problems”.
By Greg Ip. Aug. 25, :38 p.m. ET, The Wall Street Journal

3. i>clicker question
Which one of the following would NOT generate a shift in the demand curve for portable speakers?
A change in the price of music downloads.
A change in the price of headphones.
A change in the income of college-aged people.
A change in the perceived “coolness” factor of portable speakers.
A change in the price of plastic used to make portable speakers.

4. Supply Concepts
The supply function for X: QXS = g(PX, Pfop, Poc, S&T, N) Where: QXS = quantity that sellers are willing and able to supply PX = X’s price Pfop = the prices of factors of production Poc = the opportunity costs S&T = science and technology N = number of firms in the market

5. The Supply Curve (Graph)
QXS = g(PX)
Note: Law of Supply implies a positive or upward slope to the graph.
Note: In the graph we switched the axes... again.
Price
Supply 25 31
Quantity

6. Movements vs. Shifts QXS = g(PX) given Pfop, Poc, S&T, N
A movement along the supply curve for X would be caused by a change in Px.
Remember this is referred to as an increase or decrease in quantity supplied.
A shift of the entire supply curve would be caused by a change in one of the “ceteris paribus” supply variables.
This would be referred to as an increase or decrease in supply.
Price
Supply 25 31
Quantity

7. Movements vs. Shifts: Getting It Right Summary
Recall: QXS = g(PX) given Pfop, Poc, S&T, N
ΔPx
Movement along the supply curve, Px and QSx move in the same direction - the law of supply.
ΔPfop
Supply curve shifts. Pfop and supply curve move in opposite directions.
ΔPoc
Same as above.
ΔS&T
Supply curve shifts. S&T and supply curve move in the same direction. ΔN
Supply curve shifts. N and supply curve move in the same direction.

8. The Supply Curve (Equation)
A linear supply curve from the points we’ve used. QXS = 6 + PX
So, 31 =
Law of Supply?
yes!
Beware: the graph we draw is the inverse of the equation we write (most times).
Price
Supply 25 31
Quantity

9. i>clicker question
Suppose the supply curve in market “Y” is as follows: QS = P. The equation for the market inverse supply (so the picture we draw) is:
QS = /3P.
PS = Q.
QS = /3P.
PS = 5 + 1/3Q.
PS = 5 – 1/3Q. P Q

10. Market Equilibrium
We are considering the market for portable speakers.
Recall that we defined the following for our market:
The type and style of portable speakers.
The quality of the portable speakers.
All other attributes of the generic portable speaker.
A time frame that applies to our market for portable speakers.
Demanders are the buyers and from them we get the demand function, etc.
QxD = f(PX, Ps, Pc, I, T&P, Pop)
Suppliers are the sellers and from them we get the supply function, etc.
QXS = g(PX, Pfop, Poc, S&T, N)
The market is a perfectly competitive market.

11. Market Equilibrium (Verbal)
A place of “rest”.
Equilibrium: a price where the quantity demanded equals the quantity supplied.
In notation:
Find a PX* so that at PX*: QXD = QXS or
Find a PX* so that: QXD(PX*) = QXS(PX*)

12. Market Equilibrium (Table)
At P* = $17, the QD = QS=23
So Q*=23

13. Market Equilibrium (Graph)
The market equilibrium occurs at the intersection of the supply and demand curves.
Let’s drop the subscript X, ok?
Price
Demand
Supply 17
At P* = $17, QD = QS = 23
So Q* = 23 23
Quantity

14. Market Equilibrium (Equations)
Two equations and Two unknowns
Equations: Demand and Supply Curves
Unknowns: P and Q
To find P*, set QD = QS
Recall: QD = 40 - P and QS = 6 + P
So for an equilibrium: (40 - P*) = (6 + P*)
34 = 2P* or P* = 34/2 so... P*=$17
To find Q*, plug P* into either the demand or supply equation.
Q*=23 = or Q*=23 =

15. i>clicker question
Suppose the demand and supply curves in the market for fidget spinners are as follows: QD = 40 – 4P and PS = 1 + 1/2Q.
Which one is true?
Q*=7 and P*=12
Q*=12 and P*=7
Q*=7/12 and P*=12/7
Q*=7 and P*=7
none of the above is true

16. Now What? Comparative Statics!
SIMPLE AS THAT!? Then what....
Use the model to make predictions.
Something changes in the market.
Something that changes Demand.
Something that changes Supply.
Something that changes both!
Something the government does to prevent an equilibrium.
Would get a new equilibrium.
Compare one market equilibrium with another market equilibrium and see what happens to P* and Q*.
Compare two equilibriums - compare two static situations - comparative statics!

17. The Plywood Market
What impact will the approaching hurricane Irma have on the plywood market?
What do you predict will happen to the equilibrium market price and quantity? 18

18. Comparative Statics: Demand 
Price
Demand0
Supply0
P*o
Q*o
Quantity

19. The Apple Market
Michigan Apple growers expect to harvest 20.3 million bushels in 2017
Michigan’s apple growers will harvest approximately 20.3 million bushels (852.6 million pounds) of apples this year, according to the official crop estimate announced today at the USApple Outlook meeting in Chicago. This estimate is approximately four million bushels below average. Industry members are pointing to frost damage from the spring on the reduced crop size.
What do you predict will happen to the equilibrium market price and quantity – assuming similar issues for all apple producing states? 20

20. Comparative Statics: Supply 
Price
Demand0
Supply0
P*o
Q*o
Quantity

21. i>clicker question
Suppose the following two events simultaneously occur in the “tennis ball” market: 1) there is a fall in the wages of workers who make the balls 2) the fabulousness of Roger Federer at the U.S. Open increases interest in youth tennis. At the new market equilibrium we predict
both P* and Q* must fall.
both P* and Q* must rise.
P* must fall and Q* must rise.
Q* must fall and P* must rise.
Q* must rise and P* can either rise, fall or stay the same.
Price
Supply0
Demand0
P*o
Quantity
Q*o

22. Comparative Statics Summary: Can You Fill This In?
The demand curve
QD = f(P) given Ps, Pc, I, T&P, Pop
The supply curve
QS = g(P) given Pfop, Poc, S&T, N
Comparative Statics Summary:
EVENT P* Q* ↑D ↓D ↑S ↓S
↑D ↑S etc...

23. 3 Classic Government Interventions
Price Floors
Price Ceilings
Quantity Quotas
Ambrogio Lorenzetti, The Effects of Good Government in the city, Siena Italy, circa 1338

24. Price Floors Government established minimum selling price.
Floor must be above P* to be binding.
Why? Government usually thinks the market price is too low for some reason.
Usually end up with….
Surpluses!
And all the problems they create.
Examples:
supported milk prices
minimum wage laws

25. Price Floors & Market Surplus
Equilibrium is at P*=17 and Q*=23.
Price
Demand
Pfloor = $25.
Supply
At the artificially high price of $25, sellers want to sell 31.
Surplus = 16 25 15 31 17 23
But buyers only want to buy 15.
There is a surplus of 16.
Quantity

26. Price Ceilings Government established maximum selling price.
Must be below P* to be binding.
Why? Government usually thinks the market price is too high for some reason.
Usually end up with….
Shortages!
And all the problems they generate.
Examples:
Gas price ceilings
Apartment rent control

27. Price Ceilings & Market Shortage
Equilibrium is at P*=17 and Q*=23.
Price
Demand
Pceiling=$10.
Supply
At the artificially low price of $10, buyers want to buy 30. 17 23
But sellers only want to sell 16. 10 16
Shortage = 14 30
There is a shortage of 14.
Quantity

28. Quantity Quotas Government established maximum number of units sold.
Qmax must be below Q* to be binding.
Why? Government thinks too many units are being traded.
Example: import restrictions
Usually end up with...
Higher prices and more.

29. Quantity Quotas P P D D S S Q Q 30

30. Final Comments