1. Where the Consumer and Producer Meet
Equilibrium
Where the Consumer and Producer Meet

2. Market – arrangements where people trade
Farmers’ Market
Demand & Supply at center of market
Mutually beneficial for demander & suppliers to come together and make exchanges

3. Equilibrium is the point at which quantity demanded equals quantity supplied
At equilibrium there is no inherent tendency to change

4. When the Market Won’t Compromise
Surplus & Shortage
When the Market Won’t Compromise

5. Surplus When the quantity supplied exceeds the quantity demanded
What is the amount of surplus at $40?

6. Shortage
When there is an excess of quantity demanded compared to quantity supplied
What is the amount of shortage?

7. Price tends toward Equilibrium
Thus, a surplus creates downward pressure on the price, and a shortage creates upward pressure on the price
Price tends toward Equilibrium

8. When the demand curve shifts to the right (left), the equilibrium price rises (falls) and the equilibrium quantity rises (falls).

9. When the Supply Curve shifts to the left (right), the equilibrium price rises (falls) and the equilibrium quantity falls (rises).

10. Changes in Equilibrium Price/Quantity (con’t)
Approach to Analyzing Changes
1. Determine what changes: demand and/or supply
2. What direction is change: increase/decrease
3. Find new equilibrium price/quantity

11. Examples: Change in Demand
What is the initial Price Equilibrium?
What is the New Price Equilibrium?
What factors (determinants) may have caused this shift?

12. Example: Change in Supply
What is the initial Equilibrium Price/Quantity?
What is the New Equilibrium Price/Quantity?

13. Price Floors & Price Ceilings
When the Government Gets Involved

14. Price Ceilings A legal maximum that can be charged for a good
Results in a Shortage
Ex. – rent controls, credit card interest rates, oil

15. Price Floors A legal minimum that can be charged for a good.
Results in a Surplus
Ex. minimum wage, milk, sugar