Transcript Price per lb

Market equilibrium: Again
Price per lb.
Salmon
Market
S

$5.50
At a price of $5.50,
consumers can
buy all they wish
to buy. Sellers may
sell all they wish at
that price as well.
D
0
800
Quantity (lbs)
Why should the salmon market “tend
toward equilibrium”?
Price per lb.
Surplus
S
A
B
$8.00

$5.50
At a price of $8/lb.,
quantity supplied
exceeds quantity
demanded by 700
lbs.
D
0
325
800 1025
Quantity (lbs)
When the price exceeds
its equilibrium value,
price competition among
sellers will tend to push
the price down.
A salmon shortage should drives prices
up.
Price per lb.
S
$5.50
$4.00
At a price of $4/lb.,
quantity demanded
exceeds quantity
supplied by 700 lbs.

H
K
D
Shortage
0
500
800
1200
Quantity (lbs)
Effect of a change in demand
Demand could shift
right (increase) due
to
Increase in the
price of red snapper,
orange roughy, etc.
Price per lb.
Salmon
Market
$6.50
$5.50
S
1
2
Increase in
consumer incomes
(normal good).
D1
0
800 920
D2 Change of
preferences
Quantity (lbs)
Effect of a change in demand, part 2
Demand could shift
left (decrease) due
to Decrease in the
price of red snapper,
orange roughy, etc.
Price per lb.
Salmon
Market
$6.50
$5.50
S
1
Decrease in
consumer incomes.
2
 Change of
preferences
D1
0
800 920
D2
Quantity (lbs)
Effect of a change in supply
Price per lb.
Salmon
Market
$5.50
$4.50
S1
1
S2
Decrease in input
prices (fuel, bait,
wages,
transportation, etc.)
2
D1
0
800 1000
Supply could shift
right due to
Increase in the
number of
(fisherman) sellers.
 Better fishing
Quantity (lbs)
Effect of a change in supply, part 2
Price per lb.
Salmon
Market
$6.25
$5.50
Supply could shift
left due to
Decrease in the
number of
(fisherman) sellers.
S2
S1
Increase in input
prices (fuel, bait,
wages,
transportation, etc.)
2
1
D1
0
670 800
Poor fishing
Quantity (lbs)
Price per
bushel
P1
S1
S2
1
In this case,
price remains
unchanged
2
D1
0
q1
q2
D2
Quantity (bushels)
Effect of a change in
demand and supply,
part 2
Price per
bushel
P2
P1
S1
1
S2
Now both
price and
quantity
change
2
D1
0
q1 q2
D2
Quantity (bushels)
Price per
bushel
P1
S1
S0
0
1
D0
0
q0
q1
Since the shift
backward of D
is of the same
magnitude as the
shift
of S, P is unchanged.
D1
Quantity (bushels)
Price Floors and Ceilings
“Legal restrictions on market price”
•Price ceiling: The highest price at which it is legal to
trade a particular good, service, or factor of production.
Examples: Rent controls in NYC; Usury ceilings in
Arkansas; ceilings on grain storage fees in Illinois.
Price floors: The lowest price at which it is legal to trade
a particular good, service, or factor of production
Examples: Dept. of Agriculture loan rates for corn,
soybeans, cotton, rice, peanuts, . . . ;The minimum wage.
The rental
housing market in
New York City
Monthly
Rent
S
If the Rent
Control Board
sets a ceiling of
$900 per month,
3,000 apartmentseekers won’t be
able to find one.
$1,120
$900
Shortage
D
0
4,000 5,700 7,000
Rental Units
Does the minimum wage create
unemployment?
Wage rate (dollars per hour)
S
Card & Krueger
have a different
view—see “Eye on
the Economy”, p.
105.
unemployment
$5.15
D
0
3
7
Quantity (thousands of workers)
P/BU
#2 Hard KC Wheat
Surplus
A price floor of
$3.20 per bushel will
produce a surplus
of 300 bushels.
But what if
the floor were set
at $2.35?
S
$3.20
$2.52
D
0
550 700 850
bushels
Complete Exercise 2
on p. 108
Price per pair
S

P1
Start with a
graph like
this
D
0
q1
Pairs (in thousands)