1. Equilibrium, Price Controls, & Elasticity
SSEMI2c, 3b:
Explain and illustrate the effects of price floors and ceilings.

2. Equilibrium Price
The intersection of supply and demand

3. Where Demand and Supply Meet
Equilibrium is the point where Demand and Supply cross
Market equilibrium determines the price
At this price Qs = Qd
Everyone prepared to buy at that price gets what they want and everyone prepared to sell at that price does.

4. Market Equilibrium Market equilibrium Price occurs where Qd = Qs P
This occurs at Pe.
At this price, the market quantity, Qd and Qs, are the same (Qe).
Equilibrium is a state of balance. There are no shortages or surpluses. P s Pe d Q Qe

5. Changes to equilibrium
*A change to any of the variables that cause a shift in either demand or supply will cause a change in the equilibrium price and quantity. *
Factors that shift the demand curve
N*I*C*E*S*T
Factors that shift the supply curve
S*T*E*P*I*N*G

6. Example – Changes in Demand
An increase in demand caused by an increase in consumer incomes
At the new equilibrium prices have increased and quantity has increased
Price ($) s P1 Pe d' d Q Qe Q1

7. Example – Changes in Supply
A decrease in supply caused by cost of production increasing s’ s
Price ($)
Pe’ Pe
At the new equilibrium price has increased and quantity has decreased d Qe
Qe’

8. Excess Supply (Surplus)
At price p* quantity demanded (Qd) is less than quantity supplied (Qs).
There is an oversupply or surplus. (of Qs - Qd)
The market is in disequilibrium and is not stable.
Market forces ( excess supply) will tend to force prices down. s P P* d
Qd Qs Q

9. Excess Demand (Shortage)
At price P* quantity demanded is greater than quantity supplied.
There are shortages, not enough supply to meet demand
The excess demand tends to push prices up. S P P* D
Qs Qd Q

10. Price Controls

11. PRICE CONTROLS
Who likes the idea of having a price ceiling on gas so prices will never go over $1 per gallon?

12. Price floors and ceilings
One common way to achieve social goals is to have the government set prices at “socially desirable” levels.

13. To have an effect, a price ceiling must be below equilibrium
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
To have an effect,
a price ceiling must be
below equilibrium P
Gasoline S $5 4 3 2 1
Does this policy help consumers?
Result: BLACK MARKETS
Price Ceiling
Shortage
(Qd>Qs) D o Q 13

14. Shortage
Shortage: a situation where the Qd > Qs (at a given price)

15. Example of Price Ceiling
Some cities like New York, have rent controls.
In some buildings a certain percentage of apartments must be offered at a very low price.
This creates a surplus of people wanting these apartments.

16. To have an effect, a price floor must be above equilibrium
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
To have an effect,
a price floor must be
above equilibrium P
Corn S $ 4 3 2 1
Surplus
(Qd<Qs)
Price Floor
Does this policy help corn producers? D o Q 16

17. Price Floors create a Surplus
Surplus: a situation in which Qs > Qd (at a given price)
Result: Suppliers have extra goods and services.

18. Example of Price Floor
Minimum wage – the least amount an employer can pay a worker
Price Floors create a surplus of workers, leaving many people without a job.

19. Price Controls
…. A short story

20. Moving on to Elasticity……

21. Elasticity of Demand Elasticity of Demand-
Measurement of consumers responsiveness to a change in price.
Firms must ask: What will happen if price increase? How much will it effect Quantity Demanded?
Who cares?
Elasticity is used by businesses to help determine market prices.

22. Inelastic demand…. INelastic = Insensitive to a change in price.
If price increases, quantity demanded will fall a little
If price decreases, quantity demanded increases a little.
In other words, people will continue to buy it.

23. Inelastic demand…. General Characteristics of INelastic Goods:
Few Substitutes
The products are necessities
Required now, rather than later
Examples: Medical care, chewing gum

24. Elastic Demand… Elastic = Sensitive to a change in price.
If price increases, Qd will fall a lot
If price decreases, Qd increases a lot.
In other words, the amount people buy is sensitive to price.

25. Elastic Demand…. General Characteristics of Elastic Goods:
Many Substitutes
Luxuries
Large portion of income
Plenty of time to decide
Examples: soda, boats

26. Elastic vs. Inelastic
To determine if a product is elastic or inelastic you will ask yourself 3 questions:
Can the purchase be delayed?
Is the product a large portion of my income?
Are there substitutes?
If you can answer “yes” to 2 or more, the product/service is considered elastic.

27. What about the demand for insulin for diabetics?
Elastic or Inelastic?
Beef-
Gasoline-
Real Estate-
Medical Care-
Electricity-
Gold-
Elastic
INelastic
What about the demand for insulin for diabetics?

28. Price Elasticity of Supply
Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
Time period
Supply is more elastic in the long run.