Transcript Market Equilibrium

Market Equilibrium:
Supply and Demand Together =
Price
Economics
Moving to Market Equilibrium
• Supply (sellers) and demand
(buyers) work together to determine
price.
– Econoland economic activity
– Market Wheat economic activity
• A market is said to be in equilibrium
when the quantity demanded of a
good equals the quantity supplied.
Moving to Market Equilibrium
• Example
• Only at a price of $4
is the quantity
demanded equal to
the quantity supplied.
• When:
– Qs > Qd = Surplus
– Qd > Qs = Shortage
– Qd = Qs = Equilibrium
Finding Market Equilibrium
• Surplus:
– The condition in which the quantity
supplied of a good is greater than the
quantity demanded.
– Surpluses occur only at prices above
equilibrium
– Prices fall when a surplus occurs, because
suppliers hope to sell their inventory, or the
excess stock of goods that they have on
hand.
Finding Market Equilibrium
• Surplus:
– Example: Remember the starburst
activity. If you were a business your left
over resources (bolts, eyes, shells) was
your surplus
– Example: There are 40,000 Ipods. At
$400 per Ipod, buyers only purchase
30,000.
• This leaves a surplus of 10,000 Ipods.
Finding Market Equilibrium
• Shortage:
– The condition in which the quantity
demanded of a good is greater than
the quantity supplied.
– Shortages only occur at prices below
equilibrium price.
– Prices rise when there is a shortage. Buyers
will offer to pay a higher price to get sellers to
sell to them rather than to other buyers.
Finding Market Equilibrium
• Shortage:
– Example: Remember the starburst
activity. If you were a consumer you may
have overpaid for a starburst due to a
scarcity.
– Example: There are 40,000 Ipods. The
price of the Ipods is $200. Buyers want
to purchase 60,000.
• There is a shortage of 20,000
Market Equilibrium Graph
Finding Market Equilibrium
• Equilibrium:
– In a market the point at which the
quantity of a good that buyers are willing
and able to buy is equal to the quantity
that sellers are willing and able to
produce and offer for sale.
– Quantity demanded = quantity supplied
– Ex: There are 40,000 Ipods. At $320,
buyers purchase 40,000 Ipods.
Finding Market Equilibrium
• Equilibrium Quantity:
– The quantity of a good bought and sold
in a market that is in equilibrium.
• Equilibrium Price:
– The price at which a good is bought and
sold in a market that is in equilibrium.
Relationship of Quantity Demanded
to Quantity Supplied
• Qs>Qd
Surplus
• Qd>Qs
Shortage
• Qd=Qs
Equilibrium
Why Does Price Fall When a
Surplus Occurs?
•
Too much inventory!
– When a surplus occurs, the suppliers
inventories grow beyond normal
amounts. Storing extra goods can be
costly.
– Surplus = Suppliers need to reduce
the surplus by:
– cutting prices or
– cutting production output
Why Does Price Rise When There
is a Shortage?
• Scarcity!
– If a situation occurs where there are more
buyers then sellers, some buyers will offer
more money to sellers to make sure they get
the good over another buyer.
– This creates competition for a good
– Shortage = suppliers:
• Raise prices and output until equilibrium is
achiveved
What Causes Equilibrium Price to
Change?
Demand
Supply
Equilibrium Equilibrium
Price
Quantity
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– Change in Supply
– Change in Demand
– Change in Supply
and Demand
What Causes Equilibrium Price to
Change?
• Keeping market equilibrium is
important because it keeps buyer and
sellers happy.
• What would like be like without
market equilibrium if you were a
buyer? Seller?
What Causes Equilibrium Price to
Change?
• Why is the price of a new video
game systems (PS3) or Elmo dolls
cost so much around Christmas time
and then price falls after a few
months?
Price Controls
• Price Is a Signal
– Price serves as a signal that directs the
allocation of resources toward producing the
product with the highest demand.
• What Are Price Controls?
– Sometimes the government prevents markets
from reaching an equilibrium price. It may do
so by setting a price ceiling or a price floor.
Price Controls
• Price Ceiling:
– Price ceiling
creates a shortage
and reduces the
quantity of a good
bought and sold.
– Usually imposed by
the government to
keep prices more
affordable to
buyers
Price Controls
• Price Floor:
– Price floor creates
a surplus and
reduces the
quantity of the
good bought and
sold.
– Usually imposed by
the government to
help producers
make more money
Price Controls
• Price Controls and the Amount of
Exchange
– Price ceilings and price floors have the
unintended result of reducing the amount of
trade in the economy.