Transcript Surplus and Shortage

ECONOMICS
Surplus/Shortage, Equilibrium Price and
Price Ceilings/Floors
HOW PRICES ARE DETERMINED
 Equilibrium Price: Price where demand
EQUALS supply


Also called “Market Clearing Price”
NO SURPLUS OR SHORTAGE
Equilibrium Price
P
S1
Equilibrium
Price
Price
Price where
Qd=Qs
P1
D1
o
Q1
Quantity
Q
HOW PRICES ARE DETERMINED
 Surplus: When supply is greater than
demand
 To get rid of a surplus, stores lower prices
(sales) and produce less.
Surplus
P
Surplus:
Qs > Qd
S1
(Price
Floor)
P2
Price
P1
D1
o
15 Q1 20
Quantity
Q
HOW PRICES ARE DETERMINED
 SHORTAGE: Demand is greater than supply
 Stores respond by raising prices and
producing more.
Shortage
P
S1
Shortage:
Qd > Qs
(Price
Ceiling)
P1
P2
D1
o
15 Q1 20
Quantity
Q
SURPLUS OR SHORTAGE?
 A very popular singer is coming to town to
perform in a concert hall that seats 10,000
people. The ticket price for the concert is $30
per person. There are 30,000 fans in the area
who are willing to pay $80 per ticket to attend
the concert. What will happen?
SHORTAGE OR SURPLUS?
 The Ford Motor Company has designed a
new car that resembles a Ford model that
was popular 40 years ago. Ford plans to
produce 100,000 of the new-old cars each
year. Ford will price these cars at $24,000.
There are 200,000 people per year that want
to buy the car. What will happen?
SHORTAGE OR SURPLUS?
 The Fish and Wildlife Department in
California allows people to dig for razor clams
on ocean beaches 3 days a year. There is a
small charge ($10) for a license to dig these
clams. Millions of people enjoy eating razor
clams. During most of the year they buy razor
clams in fish markets for $20 to $30 per
dozen. What will happen on the days people
can dig razor clams themselves?
THE PRICE SYSTEM
 PRICE CEILING: highest price that can be
charged for a good.

Ex: rent control apartments in NYC
 Price ceilings result in SHORTAGES if set
below market price.

See graph
THE PRICE SYSTEM
 PRICE FLOORS: lowest price that can be
paid for a good or service

EX. – Minimum Wage: lowest legal wage that
can be paid to workers
 Price Floors result in a SURPLUS if set above
market price.