Transcript Equilibrium and Disequilibrium - Toronto District School Board

Equilibrium and
Disequilibrium
Messere - Grade 11 Economics
CIE 3M7
Outline
I. Introduction
A. Shortages
B. Surpluses
C. Equilibrium
II. Changes in Equilibrium
A. Change in Demand
B. Change in Supply
III. Disequilibrium - Price Controls
A. Price Floors
B. Price Ceilings
Shortage
• Let’s say that Loony’s uptown decides to
sell their CDs for $3 each.
• More than likely there will be a lot more
people wanting to buy CDs than Loony’s
has to sell.
• Why? Because at such a low price, the
quantity demanded is quite high. But
Loony’s does not want to sell that many at
such a low price.
Shortage
• This situation is called a shortage
• Shortage - when Qd > Qs at current market
price.
– Amount of Shortage = Qd - Qs
• Note - it is not correct to say Demand
exceeds Supply, but rather quantity
demanded exceeds quantity supplied.
Shortage
Result of Shortage:
• If you are the manager of Loony’s and you
find that you are selling out of CDs at $3,
what do you want to do?
– Raise the price
• Buyers can’t get all they want. Therefore,
competition among buyers drive prices up.
• P will increase
Shortage
P
SCDs
DCDs
0
Q
Shortage
P
SCDs
Psh
DCDs
0
Qs
Qd
Amount of Shortage
Q
Results of Shortage
P
S
Psh
D
0
Qs
Qd
Q
Results of Shortage
P
S
E
P*
Psh
D
0
Qs
Q* Qd
Q
Surplus
• Let’s say that as the manager, you raised the
prices of CDs to $20.
• At $20 you would love to sell a lot of CDs,
but not a lot of people are willing to pay $20
for a CD.
• So the CDs keep piling up as they come in
from your supplier, but they don’t seem to
be going out the door in sales.
Surplus
• This situation is called a surplus
• Surplus - when Qs > Qd at current market
price.
• Amount of surplus = Qs - Qd
• Note - not correct to say Supply exceeds
Demand, but rather that quantity supplied
exceeds quantity demanded.
Results of Surplus
Result of Surplus:
• As manager you have to decide what do
with all these CDs that are piling up and not
selling. What do you do?
– Have a sale!
Results of Surplus
• Firms have more than they can sell.
Therefore, firms lower price to sell the
product.
• As price decreases, Qd increases and Qs
decreases
• P will decrease
Surplus
P
SCDs
DCDs
0
Q
Surplus
Amount of
Surplus
P
SCDs
Psur
DCDs
0
Qd
Qs
Q
Results of Surplus
Amount of
Surplus
P
SCDs
Psur
DCDs
0
Qd
Qs
Q
Results of Surplus
Amount of
Surplus
P
SCDs
Psur
E
P*
DCDs
0
Qd
Q*
Qs
Q
Equilibrium in the Market
• Note that if the price is below P* then there
will be a shortage causing price to rise
• If the price is above P* then there will be a
surplus causing price to fall
• It’s as if P* is a magnet that keeps drawing
price to it (and consequently quantity to Q*)
• This magnet is sometimes called “The
Invisible Hand”
Equilibrium in the Market
• Equilibrium - where quantity demanded
equals quantity supplied.
• Equilibrium Price (P*) - price where
equilibrium occurs.
Equilibrium
P
S
E
P*
D
0
Q*
Q
Equilibrium in the Market
What Occurs at Equilibrium
• Demand Side - those who get the good are
those willing and able to pay the P*.
• Supply Side - only those firms which are
able to produce at or below the cost of P*
will remain in business.
Changes in Equilibrium
• Remember that Supply and Demand are
drawn under the ceteris paribus assumption.
• Any factors, other than price, which cause
Supply and/or Demand to change will affect
equilibrium price and quantity.
Change in Demand
• Demand will change for any of the factors
examined previously:
–
–
–
–
–
Tastes/Preferences
Income (Normal/Inferior goods/Y-dist.)
Price of Substitute/Complimentary goods
Number of Consumers
Expectations of price changes
Ceteris paribus, suppose the demand for CDs increased due
to an increase in income. How would this affect the market
equilibrium price & quantity of CDs?
Increase in Demand
P
SCDs
DCDs
0
Q
Increase in Demand
P
SCDs
P*’
P*
E’
E
D’
DCDs
0
Q* Q*’
Q
Change in Supply
• Supply will change for any of the factors
examined previously:
- Technology
- Cost of Resources
- Taxes & Subsidies
- Number of Producers
- Changes in Nature
Ceteris paribus, let’s say that the government lowers taxes
on CDs. How would this affect the market equilibrium price
& quantity of CDs?
Increase in Supply
P
SCDs
DCDs
0
Q
Increase in Supply
P
SCDs
S’
P*
P*’
E
E’
DCDs
0
Q* Q*’
Q
The Role of Prices
• Convey information
– When the price of a Maple Leaf tickets, on
average, increases by 10%, it indicates the
popularity of the Maple Leafs
• Rationiong device
– The price is what determines who can have the
good
– Price acts as a means of allocating the
good/resource to reflect its scarcity value
Market Disequilibrium
• Is it possible for the price and quantity to
NOT be in equilibrium?
• Yes - While the invisible hand may move
price towards equilibrium, price controls
tend to generate disequilibrium in the
marketplace
Price Controls
There are two types of price controls:
1) Price Ceilings
2) Price Floors
Price Ceilings
• Price Ceiling - sets a maximum price that is
allowed by law.
• Result of Price Ceiling:
– Stay at a permanent shortage situation
• Note that a price ceiling can be any price
the government chooses. It is, however only
effective if it is below the equilibrium price
Price Ceiling
• Example of Price Ceiling
• Rent controlled apartments
• In New York City, San Francisco, Boston,
and other cities the city or state determines
the maximum amount that can be charged
for rent on many apartments.
• A maximum price is a price ceiling
Rent Controlled Apartments
P
S
D
0
Q
Rent Controlled Apartments
P
S
P*
D
0
Q*
Q
Rent Controlled Apartments
P
S
P*
Pceiling
D
0
Qs
Q* Qd
Amount of Shortage
Q
Winners and Losers
Who gains and loses with price ceilings?
1. Benefit - those who get rent controlled
apartments
2. Loses - those who can’t find apartments
due to the shortage.
3. Loses - landlords who must accept
lower rent.
Price Floors
• Price Floor - sets a minimum price that is
allowed by law.
• Result of Price Floor
• Stay at a permanent surplus situation
• Note that a price floor can be set at any
price, but is only effective if it is above the
equilibrium price
Price Floors
• Example of Price Floor
• Minimum Wage Legislation
• The minimum wage is a lowest price the
government will allow firms to pay for
labor.
• A minimum price is a price floor
Price Floors
• When we look at the labor market it is
similar to other supply and demand
diagrams except for the labels.
• L - quantity of workers
• w - wages (the price we pay workers)
• It is also different because the suppliers of
labor are households, not firms, and the
demanders of labor are firms, not
households
Minimum Wage Legislation
Wage
S
D
0
# of Workers
Minimum Wage Legislation
Wage
S
w*
D
0
L*
# of Workers
Minimum Wage Legislation
Amount of Unemployed
Workers
Wage
S
wfloor
w*
D
0
Ld
L*
Ls
# of Workers
Winners and Losers
Who gains and loses with price floors?
1. Benefit - those who get higher wages
2. Loses - those who can’t find jobs at the
higher wage
3. Loses - firms who must pay higher wages.
Further Practice
• Take a sheet of paper out and number it
from 1 to 5.
• For each question indicate whether:
- price increased, decreased or it was
indeterminate (impossible to determine)
- quantity increased, decreased or it was
indeterminate (impossible to determine)
Practice Test Link