Transcript Equilibrium and Disequilibrium

Equilibrium and
Disequilibrium
Outline
I. Introduction
A. Shortages
B. Surpluses
C. Equilibrium
Outline (Cont.)
II. Changes in Equilibrium
A. Change in Demand
B. Change in Supply
C. Change in Both Demand and Supply
III. Disequilibrium
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
Shortage
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Shortage
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D
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Shortage
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Shortage
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Amount of Shortage
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Results of Shortage
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Psh
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Qd
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Results of Shortage
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P*
Psh
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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
Surplus
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Surplus
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Surplus
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Surplus
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Surplus
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Psur
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Qd
Qs
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Results of Surplus
Amount of
Surplus
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Results of Surplus
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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
Equilibrium in the Market
• Equilibrium - where quantity demanded
equals quantity supplied.
• Equilibrium Price (P*) - price where
equilibrium occurs.
Equilibrium
P
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P*
D
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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 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
discussed previously.
• For instance, let’s say the demand for CDs
increased due to an increase in income
Increase in Demand
Increase in Demand
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Increase in Demand
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Increase in Demand
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Increase in Demand
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Increase in Demand
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Increase in Demand
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P*’
P*
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Q* Q*’
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Change in Supply
• Supply will change for any of the factors
discussed previously.
• For instance, let’s say that the government
lowers taxes on CDs
Increase in Supply
Increase in Supply
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Increase in Supply
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Increase in Supply
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Increase in Supply
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Increase in Supply
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Increase in Supply
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P*’
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Changes in Demand and Supply
To determine the impact of both supply and
demand changing:
• First examine what happens to equilibrium
price and quantity when just demand
shifts.
• Second, examine what happens to
equilibrium price and quantity when just
supply changes
• Finally, add the two effects together.
Changes in Demand and Supply
General Results:
• When supply and demand move in the same
direction
• It is difficult to determine Equilibrium price from the
original Equilibrium point.
• When supply and demand move in opposite
directions
• It is difficult to determine Equilibrium quantity from
the original Equilibrium point.
Increase in Supply and Demand
Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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Increase in Supply and Demand
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