1. Supply and Demand
Equilibrium

2. Equilibrium Disequilibrium I. Supply and Demand
point where quantity supplied = quantity demanded
The price of each good is set by a market equilibrium
Disequilibrium
any price or quantity not at equilibrium
When price is in disequilibrium, there will either be a shortage or surplus
Equilibrium in the market for goods and services also represents an efficient resource allocation; happens when buyers and sellers are in agreement on price and quantity; buyers and sellers will both eventually agree because of their profit incentive and equilibrium

3. II. Class Practice Change in Demand Change in Supply Income
Resource Prices
Consumer Expectations
Number of Sellers in the Market
Price of Related Goods
Taxes and Subsidies
Population
Price of Other Goods
Taste and Preferences
Price Expectations
There is a new salmonella scare.
Doritos is endorsed by Michael Phelps.
The government subsidizes solar panels
Resource costs for T-shirts increase
Shifts can happen at the same time; sometimes price or quantity comes out ambiguous

4. II. Class Practice
1) Which of the following describes what will happen in the market for tomatoes if a salmonella outbreak is attributed to tainted tomatoes?
Supply will decrease and price will increase.
Supply will decrease and price will decrease.
Demand will decrease and price will increase.
Demand will decrease and price will decrease.
Supply and demand will both decrease. D

5. II. Class Practice
2) Which of the following will lead to an increase in the equilibrium price of product “X”? A(n)
Increase in consumer incomes if product “X” is an inferior goods
Increase in the price of machinery used to product “X”
Technological advance in the production of good “X”
Decrease in the price of good “Y” (a substitute for good “X”)
Expectation by consumers that the price of good “X” is going to fall.

6. II. Class Practice
3) The equilibrium price will rise, but equilibrium quantity may increase, decrease, or stay the same if
Demand increases and supply decreases
Demand increases and supply increases
Demand decreases and supply increases
Demand decreases and supply decreases
Demand increases and supply does not change

7. II. Class Practice
4) An increase in the number of buyers and a technological advance will cause
Demand to increase and supply to increase
Demand to increase and supply to decrease
Demand to decrease and supply to increase
Demand to decrease and supply to decrease
No change in demand and an increase in supply

8. II. Class Practice
5) Which of the following is certainly true if demand and supply increase at the same time?
The equilibrium price will increase
The equilibrium price will decrease
The equilibrium quantity will increase
The equilibrium quantity will decrease
The equilibrium quantity may increase, decrease, or stay the same

9. II. Class Practice
Draw a correctly labeled graph showing the market for cups of coffee in equilibrium. On your graph, show the effect of a decrease in the price of coffee beans on equilibrium price and equilibrium quantity in the market for cups of coffee.

10. III. Government Intervention
Shortage
Quantity demanded is higher than quantity supplied
Excess Demand
Surplus
Quantity supplied is higher than quantity demanded
Excess Supply
Given enough time, markets will eventually reach equilibrium
This phenomenon is called, the Invisible Hand;
Calculating shortages and surpluses

11. III. Government Intervention
Price Ceilings
Maximum price set by the government for a product.
Ex. Rent Control
Price Floors
Minimum price set by the government for a product.
Ex. Minimum Wage
Ceilings: inefficient allocation to consumers (very hard to get, those who do not need it will have it), Wasted Resources (people spend a lot of money, effort, and time to cope with the shortage), Inefficiently Low Quality, Black Markets; Price ceilings on raw materials in WWII and oil during the shortage in the 1970’s to keep companies from taking advantage of customers. Those who benefit may be better organized and more vocal and people do not realize that they would be better off without them.
Floors: inefficient low quality (surplus); Inefficient allocation of sales among sellers, wasted resources (workers spending too much time looking for work), inefficient high quality (offering high quality products, but at a higher price buyers will not chose), illegal activity (black labor) labor off the books; government might buy unwanted surplus, they may sell products cheap overseas, give away to schools, or destroy the surplus. US pays farmers not to produce at all.
Show why these would not effect a market.

12. III. Government Intervention
“Quotas”
Quantity Control
An upper limit on the quantity of some good that can be bought or sold.
Medallions for taxis have become valuable because there is quota on the amount given out each year.
Government controls quantity by giving out licenses
Seafood, hunting, liquor licenses
The price at which consumers want to buy a given quantity is the demand price of that quantity
The price at which producers are willing to provide a given quantity is the supply price of that quantity.
Deadweight loss or “the wedge” the earnings that accrue to the medallion holder from ownership of a valuable commodity
Represents the missed gains from taxi rides prevented by the quota, a loss experienced by both riders and would-be drivers
Those that are still wanting a ride, will pay $6 that becomes our new equilibrium
At this new price, taxi drivers will be more willing to take time off because they are making more money, they also hold the upper hand in the market because they have the medallion, so therefore they are able rent out their medallions to other drivers for four dollars because they are able to sell their service at a higher dollar and can still make $2

13. IV. Class Practice 1. Quotas lead to which of the following? I II III
Inefficiency due to missed opportunities
Incentives to evade or break the law
A surplus in the market I II
III
I and II
I, II, and III D

14. IV. Class Practice
2. Which of the following would decrease the effect of a quota on a market? A(n)
Decrease in demand
Increase a supply
Increase in demand
Price ceiling above the equilibrium price
None of the above A

15. IV. Class Practice 3. To be effective, a price ceiling must be set I
Above the equilibrium price.
In the housing market.
To achieve the equilibrium market quantity. I II
III
I, II, and III
None of the above E

16. IV. Class Practice
4. Effective price ceilings are inefficient because they
Create shortages.
Lead to wasted resources.
Decrease quality.
Create black markets.
Do all of the above. E