Transcript Lecture 5 The Market Equilibrium

The Market Equilibrium
(One More Time)
■ Market demand and supply
■ Bring together suppliers and demanders
■ Equilibrium
Market Demand Is the Sum of
All Individual Demands
At each price, sum the individual quantities demanded,
Da, Db … Dn, to get market quantity demanded (Dm)
+
Da
=
Db
Dm = ∑ Da +
Db + . . . Dn
Dm
Market Supply Is the Sum of All
Individual Suppliers
At each price, sum the individual quantities supplied to get
market quantity supplied (Sm)
Sm = ∑ Sa + Sb … Sn
Sb
Sa
+
=
Sm
Competition
■ Demanders compete with each other to get goods.
Their efforts push price up, enriching suppliers.
■ Suppliers compete with each other to attract
customers.
Their efforts push price down, enriching demanders.
■ Demanders do NOT compete with suppliers, even
thought it sometimes seems that way!
They are bargaining:
Each party tries to convince the other of the powerful
competition faced by alternatives.
Equilibrium: Competition means
mutually beneficial cooperation
At “equilibrium” no one has an incentive to change behavior:
Price
S
P*
D
Q*
Q/time
Adjustments to equilibrium
■ Price above P*
► Quantity supplied exceeds quantity demanded: excess
supply, or “surplus”
► Frustrated suppliers compete for business, lowering
prices (“buyers’ market”)
► Price falls until market clears
■ Price below P*
► Quantity demanded exceeds quantity supplied: excess
demand, or “shortage”
► Frustrated demanders compete for product, raising
prices (“sellers’ market”)
► Price rises until market clears
Adjustment process
What if the price is NOT right?
■Competition forces push price toward equilibrium:
Price
P high
P low
Excess Supply
Excess Demand
S
D
Q/time
Minimum Wage: A Price Floor



Legal minimum on wage: Wm
– If greater than W*
 excess supply of labor
Winners:
– Those who keep their jobs
Losers
– Firms (& their customers) who pay
– Those who lose their jobs
$
S
Wm
W*
D
0
Ld L* Ls
Labor
Data Confirming Theory
Rent Controls:
A Price Ceiling on Apartments

Legal maximum on allowable rent:
Pm less than P*


 excess demand for space
Winners:
– Those who keep apartments
Losers
– Landlords
– Those who can’t get in
$
S
P*
Pm
D
0
Qs Q* Qd
Quantity
Questions

How do each of these events influence
the equilibrium
(i) price of airline tickets and
(ii) quantity of airline trips taken
1. Rise in price of jet fuel
2. Depression in the economy
3. Threat of war
4. Government regulations making air
travel safer