1. Today Market Equilibrium How shifts in demand and supply affect the market equilibrium Price floors & price ceilings

2. The Market for Cheese Two main questions: What will be the price of cheese? How much will be exchanged?

3. The Equilibrium Condition The Equilibrium Condition : In order for the price and the quantity exchanged to remain unchanged, the Q D must equal the Q S. Note: If D or S shift, then this will lead to a new equilibrium.

4. Market Equilibrium, Graph Price ($/lb.) 4 P*=3 2 1 0 0 100Q*= 200 300 400 S The equilibrium price, where Q D = Q S, is $3. The equilibrium Q is 200 lbs. D Quantity (lb.per week)

5. Why Equilibrium? Excess demand or shortage : when Q D > Q S, at a particular price. Excess supply or surplus : when Q S > Q D, at a particular price. An observation: Excess demand causes P to rise. Excess supply causes P to fall. Equilibrium: No excess demand, no excess supply. Stable price.

6. Market Equilibrium, Graph Price ($/lb.) 4 P*=3 2 1 0 0 100Q*= 200 300 400 S What if P=$4? What if P=$2? D Quantity (lb.per week)

7. Market for Sunflower Seeds 200 Where is the initial equ.? What if a new s.s. diet becomes fashionable? Price ($/lb.) 4 3 2 1 0 0 100 300400 S D Quantity(lb.per week)

8. Sunflower Seed Diet is Fad 200 Why does D shift? What happens to equ. P & Q? Does this make sense? Price ($/lb.) 4 3 2 1 0 0 100 300400 S D Quantity(lb.per week) D’

9. Description of Events “The demand for sunflower seeds increased, which pushed up the price of sunflower seeds, increasing the quantity supplied.”

10. A Closer Look at Adjustment What drives P upward? Q D >Q S Shortage at P 0. Price will rise. Price ($/lb.) S D D’ Quantity(lb.per week) QSQS P0P0 QDQD

11. A Closer Look at Adjustment As the price rises, Q D will fall & Q S will rise. Shortage gone at P 1. Price ($/lb.) S D D’ Quantity(lb.per week) QSQS P0P0 QDQD P1P1 Q

12. Market for Corn What if the price of soybean oil rises? Consider changes to both D & S. Price ($/bu.) S D Quantity(bu. per year)

13. Market for Corn P of soybean oil rises. Why does S shift? Why does D shift? Price ($/bu) S D S’ Quantity(bushels per year) Q0Q0 Q1Q1 P1P1 P0P0 D’

14. Simultaneous Changes in D & S The ultimate effect on equ. P & Q will depend on how much D shifts relative to the shift in S. In our example, price must rise, but quantity exchanged might rise or falls depending on which effect is stronger. Experiment on your own with various combinations of D & S changes!

15. Price Controls When the gov’t sets a legal min. or max. price. Price Floor: a legal minimum price. (Not allowed to charge less than $___.) Note: If it is set below the equilibrium price, will not affect the market. Said to be “nonbinding”. We focus on binding price floors.

16. Price Floor QS> QDQS> QD Surplus created by law. What Q is exchanged? Price S D Quantity QSQS P Floor QDQD

17. Effects of Price Floor With a price floor, there is a surplus. W/O the law, the price would fall, eliminating the surplus.

18. Minimum Wage Laws Sets a minimum price of labor.

19. Binding Minimum Wage Laws Firm are demanders of L. Workers are suppliers of L. Wage is price. What do we call a surplus of L? Wage S D Labor Hours QSQS Wage Floor QDQD

20. Is the current min. wage law binding? How can you tell?

21. Binding Minimum Wage Laws Goal: Give lowest-skilled workers an above- market wage. Effects: Those with jobs get higher income. Fewer jobs available, harder to find jobs. Employers may discriminate more easily.

22. Minimum Wage Effects, Cont’d. Winners Those who keep job (they earn more per hour). Losers Workers who lose their job (or get hours cut). Workers who can’t find work. Employers (pay higher wage, can’t afford as many workers).

23. Price Ceiling Price Ceiling: a legal maximum price.

24. Price Ceiling QD> QSQD> QS Shortage created by law. What Q is exchanged? Price S D Quantity QDQD P Ceiling QSQS

25. Coming Up: Begin Ch. 18, elasticity

26. Group Work: Changes in Market Equilibrium For each scenario, address the following: Does demand or supply shift? Which direction does it shift? Draw the new curve on the graph on properly label it. Indicate the new equilibrium price & quantity. Explain what happened in this market in complete sentences.

27. Market for Clothing There is a recession. Price /item S D Items per week Q0Q0 P0P0

28. Market for strawberries What if the price of cabbage rises? Hint: farmers can plant either one in the same fields. Price ($/lb.) S D Quantity(lb. Strawb. per week) Q0Q0 P0P0

29. Market for Yogurt What if the price of live yogurt cultures falls? Hint: Live cultures are needed to make yogurt. Price ($/tub.) S D Quantity(tubs per week) Q0Q0 P0P0