Module 7
Changes in Equilibrium
What you will learn in this Module:
1.
How equilibrium price
and quantity are
influenced/affected
when there is a
change in either
supply or demand
2. How equilibrium price
and quantity are
influenced/affected
when there is a
simultaneous
change in both
supply and demand
What Happens When the Demand
Curve Shifts?
 3 Questions to ask yourself:
1. What shifter is at work in the market?
2. What curve is shifting and in which
direction?
3. What happens to equilibrium price and
quantity?
4. Example: Tickets to a popular band. As
the band experiences more success
and gets more air time on the radio,
they become more popular with fans.
What happens to the price of a concert
ticket?
Concert Tickets Anyone?
Increase in Demand
 Draw the market demand
1.
2.
3.
4.
curve for tickets to see this
band.
Identify the original price as
Pe (equilibrium) and
quantity of as Qe.
What shifter is at work in
the market?
What curve is shifting and
in which direction?
What happens to
equilibrium price and
quantity?
Concert Tickets Anyone?
Increase in Demand
Leads to a movement
along the supply curve
to a higher
equilibrium price and
higher equilibrium
quantity
 Draw the market demand
1.
2.
3.
4.
curve for tickets to see this
band.
Identify the original price as
Pe (equilibrium) and
quantity of as Qe.
What shifter is at work in
the market?
What curve is shifting and
in which direction?
What happens to
equilibrium price and
quantity?
Price
Ticket
An increase
in demand …
S
E2
P1
Shortage
E1
Pe
1) Stronger taste for the band
2)Demand shifts right
3)Price and quantity both increase…why?
D2
D1
Qe
Q1
Quantity rises
Qty of Tickets
Effects of a Decrease in Demand
 During a recession, people buy
1.
2.
3.
4.
fewer new cars. What happens
to the price of a new car? Draw
the market for new cars.
Identify the original price as
Pe and quantity Qe.
What shifter is at work in
the market?
What curve is shifting and
in which direction?
What happens to
equilibrium price and
quantity?
Effects of a Decrease in Demand
 During a recession, people buy
1.
2.
3.
4.
fewer new cars. What happens
to the price of a new car? Draw
the market for new cars.
Identify the original price as
Pe and quantity Qe.
What shifter is at work in
the market?
What curve is shifting and
in which direction?
What happens to
equilibrium price and
quantity?
Price of
cars
Leads to a movement
along the supply curve
to a lower equilibrium
price and lower
equilibrium quantity
S
E1
Pe
Surplus
A decrease in
demand …
E2
P1
1) Lower income during a recession .
2) Demand shifts to the left for normal
goods.
3) Price and quantity both decrease.
D1
D2
Q1
Qe
Quantity demanded falls
Qty of Cars
A Review: Write a test question that corresponds
to what is happening in these graphs.
Summary: Market Response to a
Change in Demand
An increase in demand
leads to a rise in both
e_____________p______
and the e_____________
q____________supplied.
2. A decrease in demand leads
to a ______ in both the
equilibrium price and the
equilibrium quantity
supplied.
1.
Demand
Demand
Equilibrium
price & Qs
Equilibrium
Price & Qs
Summary: Market Response to a
Change in Demand
An increase in demand
leads to a rise in both
equilibrium price and
the equilibrium quantity
supplied.
2. A decrease in demand
leads to a fall in both the
equilibrium price and the
equilibrium quantity
supplied.
1.
Demand
Demand
Equilibrium
price & Qs
Equilibrium
Price & Qs
What Happens When the Supply Curve
Shifts?
 3 questions to ask yourself:
1. What shifter is at work in the
market?
2. What curve is shifting and in which
direction?
3. What happens to equilibrium price
and quantity?
 Keep in mind when supply increases, it
increases horizontally (more quantity) not
vertically.
Forever in Blue Jeans: Decreasing Supply
1.
2.
3.
4.
5.
Example: Cotton is a important
raw material when making
clothes like denim jeans. If the
global price of cotton rises,
what happens to the price of
jeans?
Draw the market for jeans.
Identify the original price as Pe
and quantity as Qe.
What shifter is at work in
the market?
What curve is shifting and
in which direction?
What happens to
equilibrium price and
quantity?
Forever in Blue Jeans:
Decreasing Supply
1.
2.
3.
4.
5.
Example: Cotton is a important
raw material when making
clothes like denim jeans. If the
global price of cotton rises,
what happens to the price of
jeans?
Draw the market for jeans.
Identify the original price as Pe
and quantity as Qe.
What shifter is at work in
the market?
What curve is shifting and
in which direction?
What happens to
equilibrium price and
quantity?
S1
Price
of
jeans
S
E2
P1
Pe
1) Input price has increased (cotton)
2) Supply of jeans shifts to the left
3) Price increases and quantity supplied
decreases. WHY?
E
D
Q1
Qe
Quantity of jeans
Quantity supplied decreases
Corny Supply Curve Shifts: Increasing Supply
1.
2.
3.
4.
5.
Production technology has
greatly improved agriculture,
producing more corn on the
same amount of land. How
has the better technology
affected the price of corn?
Draw the market for corn,
Identify the original price as
Pe and quantity as Qe.
What shifter is at work in the
market?
What curve is shifting and in
which direction?
What happens to
equilibrium price and
quantity?
Corny Supply Curve Shifts: Increasing Supply
1.
2.
3.
4.
5.
Production technology has
greatly improved agriculture,
producing more corn on the
same amount of land. How
has the better technology
affected the price of corn?
Draw the market for corn,
Identify the original price as
Pe and quantity as Qe.
What shifter is at work in the
market?
What curve is shifting and in
which direction?
What happens to
equilibrium price and
quantity?
Price
of
corn
S
S1
E
Pe
E1
P1
1) Better technology leads to more corn…
2) Supply curve shifts to the right (growing)
3) Price decreases and quantity supplied
increases. WHY?
D
Qe
Q1
Quantity of Corn
A Review: Write a test question that corresponds
to what is happening in these graphs.
Summary: Market Response to a
Change in Supply
1.
An increase in supply leads
to a ________ in the
equilibrium price and a
rise in the equilibrium
quantity.
Fall in
Equilibrium
Price &
quantity
Supply
2. A decrease in supply leads
to a rise in
e_______________
p_______ and a rise in
the e_______________
q__________.
Supply
Rise in
Equilibrium
price &
quantity
Summary: Market Response to a
Change in Supply
1.
An increase in supply leads
to a fall in the equilibrium
price and a rise in the
equilibrium quantity.
Fall in
Equilibrium
Price &
quantity
Supply
2. A decrease in supply leads
to a rise in equilibrium
price and a rise in the
equilibrium quantity.
Supply
Rise in
Equilibrium
price &
quantity
Simultaneous Shifts of Supply &
Demand Curves
 Four possible scenarios. Graphs will
follow.
 When there is both a demand and a
supply shift, here is a summary of
what we can, and cannot, predict.
 Demand and Supply move in
opposite directions.
 When demand increases and
supply decreases, the equilibrium
price rises but the change in the
equilibrium quantity is ambiguous.
Simultaneous Shifts of Supply & Demand Curves:
Demand Increases & Supply Decreases
 When demand
increases and supply
decreases the
equilibrium price
definitely increases,
but quantity is
ambiguous
 Ex: the demand for
wheat increases
AND the supply of
wheat
decreases…the
result is a definite
increase in the
market price, but an
indeterminate
change in quantity.
Simultaneous Shifts of Supply & Demand Curves:
Demand Decreases & Supply Increases
 When demand
decreases and
supply increases the
equilibrium price
definitely decreases,
but quantity is
ambiguous
 Ex: A decrease in the
demand for pop
music combined with
an increase in pop
artists (think 1970s)
would reduce the
market price but
would have an
indeterminate effect
on the quantity of
pop music produced.
Simultaneous Shifts of Supply & Demand Curves
Demand and Supply move in the same direction
 When demand and
supply increase, the
change in equilibrium
price is ambiguous, but
equilibrium quantity
definitely increases
 Ex: The recent Summer
Olympics has increased
the popularity of
volleyball and more
companies have begun
producing volleyballs.
How will these events
affect the market for
volleyballs?
Simultaneous Shifts of Supply & Demand Curves:
Both demand and supply decrease
 When demand and
supply decrease,
the change in
equilibrium price is
ambiguous, but
equilibrium
quantity definitely
decreases
 Example: a decrease in the
demand for disco music
combined with a decrease
in disco artists would
result in a definite
decrease in the quantity of
disco produced, but would
have an indeterminate
effect on the price of the
music.
Summary: Simultaneous Shifts of
Supply & Demand Curves
Demand and Supply
move in opposite
directions: Q_________ is
a_____________
2. Demand and Supply
move in the same
direction:
E______________
p__________is
a______________
1.
Notes:
Summary: Simultaneous Shifts of
Supply & Demand Curves
Notes:
Demand and Supply
move in opposite
directions: Quantity is
ambiguous
2. Demand and Supply
move in the same
direction: equilibrium
price is ambiguous
1.
Simultaneous Shifts of Supply &
Demand Curves
 The demand for corn
has increased due to
the new government
regulation that gas
must contain 10 %
ethanol (ethanol is
made from corn).
 The supply for corn
has decreased due to
a massive drought in
the Midwestern US.
How do these 2
events affect the
market for corn?
Will supply decrease?
Simultaneous Shifts of Supply &
Demand Curves
 The demand for corn
has increased due to
the new government
regulation that gas
must contain 10 %
ethanol (ethanol is
made from corn).
 The supply for corn
has decreased due to
a massive drought in
the Midwestern US.
How do these 2
events affect the
market for corn?
Price
Corn
New E at a
higher price
Supply falls?
S
Shortage due
to drought
P1
Demand for
corn rises
Pe
Will supply decrease?
D2
D
Qe
Quantity Corn
A Way to Remember Demand &
Supply Shifters
 TRICE Shifts SUPPLY
 Technology
 Related Prices
(complements &
Substitutes)
 Input prices
 Competition (# of
producers)
 Expectations (of prices)
 MERIT Shifts DEMAND
 Market Size (# of




consumers ~ population)
Expectations (of prices)
Related Prices
(complements &
substitutes)
Income (normal & inferior
goods)
Tastes of Consumers
Demand & Supply Analysis:
Fill in the blank. Be prepared to draw the graph.
The market
for _______
Event
1. Gasoline
Hurricane shuts
down oil platforms
in the gulf
2. Silly bands
Friendship bracelets
become a huge hit
with teens
3. Mussels
Drought causes
producers to exit
the industry
4. Kerosene
Winter is coming.
Gasoline production
ramps down
5. Kerosene
Winter is coming
6. New
Furniture
Gov’t gives tax
rebates
Shifter (s)
Causes the
___________
curve to____
E Price
_______
E Quantity
__________
Demand & Supply Analysis:
Fill in the blank
The market
for _______
Event
Shifter (s)
Causes the
___________
curve to____
E Price
_______
E Quantity
__________
1. Gasoline
Hurricane shuts
down oil platforms
in the gulf
Input prices
supply curve
shift left
increases
decreases
2. Friendship
bracelets
Friendship bracelets
become a huge hit
with teens
Increases
increases
3. Mussels
Drought causes
producers to exit the
industry
Winter is coming.
Gasoline production
ramps down
4. Kerosene
5. Kerosene
Winter is coming.
People need warmth
6. New
Furniture
Gov’t gives tax
rebates
Consumer
tastes
Demand
curve to
shift right
Competition
& Input prices
Supply curve
shifts left
Increases
decreases
Expectations
of producer
Supply
shifts right
decreases
Increases
Consumer
tastes
Income
effect
Demand
curve to shift
right
Increases
Increases
Increases
increases
Demand curve
shifts right
 Module 7 Review p. 75-76 all questions
 Read Module 8 p.77-85
 Finish Supply Activity Packet p. 29 – 31
& Strive for a 5
Module 8 Price
Controls:
Ceilings & Floors
What you will learn in this Module:
 What is the meaning of price control? How does
the government use them to intervene in
markets?
 How do price controls can create problems and
make a market inefficient?
 Why are economists are often deeply skeptical of
attempts to intervene in markets?
 Who benefits and who loses from price controls?
Why they are used despite their well-known
problems?
Why Do Governments Control Prices?
1. Unpopular market prices:
Examples?
2. Political pressure:
Examples?
Why Do Governments Control Prices?
1. Unpopular market prices:
2. Sometimes when the market is
efficient, it is judged as being
unfair to some groups. Usually
those that are disadvantaged
(poor) and struggling to begin
with.
3. Examples?
4. Political pressure: “make markets
fair”
5. Examples?
Terms to Know:
Price Ceilings & Price Floors
1. Price Control:
2. Price Ceilings:
3. Price Floors:
Video Clips:
price Ceilings &
Floors
Terms to Know:
Price Ceilings & Price Floors
1. Price Control: Legal restrictions
on how high or low a market
price may go.
2. Price Ceilings: Maximum price
sellers are allowed to charge for
a good or service
3. Price Floors: minimum price
buyers are required to pay for a
good or service
Video Clips:
price Ceilings &
Floors
Hit da Roof Thinkarama
 A price ceiling is a maximum price sellers are allowed
to charge for a good.
 Who would want such a thing? (Ding! Ding! Ding!)
 Consumers, of course!
 Use your phone. With a partner:
 Use the space below and answer the questions.
1. What goods/services do you consider to be unfairly
expensive? List 3.
2.
Should the government enact a price ceiling for
your good or service?
3.
Why or why not?
4.
Be prepared to explain to the class.
Price Ceilings
1. Legal maximum price typically
imposed during a crisis (wars,
harvest failures, natural disasters)
to keep necessary goods and
service available to the masses
2. With your phone find examples.
Price Ceilings
 Legal maximum price typically
imposed during a crisis (wars,
harvest failures, natural disasters) to
keep necessary goods and service
available to the masses
 With your phone find examples.
1. Raw Material prices during WWII
2. Oil Embargo in 1970s led to price
controls
3. California electricity shortage
4. New York City rent controlled
apartments
Model of a Price Ceiling:
Drawing Shortages
1.
2.
Pricing below
equilibrium will cause a
shortage because
__________will exceed
__________. (example:
biscuits)
Shortage at Pc = Q___Q___
3.
If the Pc=$2, Qd =5.75
and Qs = 4 so there is a
shortage of almost 2
biscuits.
4.
Is this so bad? Aren’t
consumers helped by
this lower price?
Model of a Price Ceiling:
Drawing Shortages
1.
2.
Pricing below equilibrium
will cause a shortage
because demand will
exceed supply. (example:
biscuits)
Shortage at Pc = Qd - Qs
3.
If the Pc=$2, Qd =5.75 and
Qs = 4 so there is a
shortage of almost 2
biscuits.
4.
Is this so bad? Aren’t
consumers helped by this
lower price? Yes, if you
are among the lucky 4
who get biscuits!
How a Does a Price Ceiling Cause
Inefficiency In the Market?
1. Inefficient Allocation to Consumers:
2. Wasted Resources:
3. Inefficiently Low Quality:
4. Black Markets:
How a Does a Price Ceiling Cause
Inefficiency In the Market?
1.
Inefficient Allocation to Consumers: people who want the good and are
willing to pay the high price don’t get it, & those who care little about the
product & are only willing to pay a small amount get it 
2.
Wasted Resources: people expend money effort and time to cope with the
shortage caused by the price ceiling. 
3.
Inefficiently Low Quality: sellers offer a low quality product at a low price
even though buyers may prefer a high quality at a higher price 
4.
Black Markets: market where goods & services are bought and sold
illegally (illegal product or the price charged is prohibited by the price
ceiling) 
So WHY Are there Price Ceilings if
They Are Inefficient?
1. Benefit to some _______________: Consumers
may have the __________________to persuade
government that the equilibrium price is taking
advantage of them.
 What kind of argument is this?
 ________________
2. _________________________________: When
price ceilings have been in effect for a long time,
buyers may not have a realistic idea of what would
happen without them.
 Examples???
 3. Lack of _______________ _______________:
Government officials often do not understand
supply and demand analysis (or they may but just
want to be re-elected)
So WHY Are there Price Ceilings if
They Are Inefficient?
 1. Benefit to some consumers: Consumers may





have the political clout to persuade government
that the equilibrium price is taking advantage of
them.
What kind of argument is this?
Normative
2. Because it has always been done like that:
When price ceilings have been in effect for a long
time, buyers may not have a realistic idea of what
would happen without them.
Examples???
3. Lack of Economic Understanding: Government
officials often do not understand supply and
demand analysis (or they may but just want to be
re-elected)
Graphing a Price Ceiling: TAXI!!!!
1.
2.
3.
4.
5.
The City of San Francisco
places a limit on the amount
taxis can charge at the airport
below equilibrium price.
Draw the correctly labeled
market for taxi transportation.
Identify the original price ($30
per hr.) as Pe and quantity as
Qe (35 taxis)
Identify the price control at
$10.00. Label the price control.
Identify the result of the price
control in terms of Qd and Qs.
What is the difference
between quantity supplied and
quantity demanded?
Graphing a Price Ceiling: TAXI!!!!
1.
2.
3.
4.
5.
The City of San Francisco
places a limit on the amount
taxis can charge at the airport Price
below equilibrium price.
60
Draw the correctly labeled
50
market for taxi transportation.
Identify the original price ($30
40
per hr.) as Pe and quantity as
Qe (35 taxis)
Pe 30
Identify the price control at
$10.00. Label the price control.
20
Identify the result of the price
10
control in terms of Qd and Qs.
What is the difference
0
between quantity supplied and
quantity demanded?
S
Price
Ceiling
Qd>Qs
Shortage
D
10
20
30
40
Qe
50
60
Quantity
Changing Directions:
Price Floors
2.
Legal ______________price that can be
charged for a good or product. Used to push
prices ____ instead of bring them ______.
Examples:
3.
Explain the cartoons on the right.
1.
Changing Directions:
Price Floors
1. Legal Minimum price that can be
charged for a good or product.
Used to push prices UP instead of
bring them down.
2. Examples:
Agricultural products: wheat, milk,
corn
2. Trucking (phased out in 1980)
3. Air Travel (phased out in 1978)
4. Minimum wage
1.
Model of a Price Floor:
Minimum Wages
Draw minimum wage
price floor
2. If wages are above
equilibrium, the
supply of labor will
be _____________.
3. The demand for
labor by businesses
will ______ because
wages (an ________
cost) has been made
artificially _______.
1.
Model of a Price Floor:
Minimum Wages
Draw minimum wage
price floor
2. If wages are above
equilibrium, the
supply of labor will
be abundant or in
surplus.
3. The demand for
labor by businesses
will fall because
wages (an input
cost) has been made
artificially high.
1.
Pf
How Does A Price Floor Cause
Inefficiency in the Market?
http://www.youtube.co
m/watch?v=P8G1HIlRp
po&safety_mode=true
&persist_safety_mode=
1&safe=active
How Does A Price Floor Cause Inefficiency in the Market?
 Price floors lead to excess supply; the quantity supplied is greater than
quantity demanded
1. Inefficiently Low Quantity:
2. Inefficient Allocation of sales Among Sellers:
3. Wasted Resources:
How Does A Price Floor Cause Inefficiency in the Market?
 Price floors lead to excess supply; the quantity supplied is greater
than quantity demanded
1. Inefficiently Low Quantity: Since a price floor raises the price of a
good to consumers, quantity demanded falls, so the quantity bought
and sold falls, creating a loss to society.
2. Inefficient Allocation of sales Among Sellers: Those who would be
willing to sell the good at the lowest price are not always those who
actually manage to sell it. The price floor has just enabled a less
efficient seller to make a sale, and might force an efficient seller out of
the market.
3. Wasted Resources: Government price floors set above the
equilibrium price cause surpluses which the government may be
required to buy and destroy.
 Minimum wages result in fewer jobs available and so would-be
workers waste time searching for a job.
 What do we do with the surplus food? Give it to lunch programs?
 Maybe they go to waste, even if the government purchases them.
How Does A Price Floor Cause Inefficiency in the Market?
4. Inefficiently High Quality:
5. Illegal Activity:
How Does A Price Floor Cause Inefficiency in the Market?
4. Inefficiently High Quality: Sellers offer high-quality goods at a
high price, even though buyers would prefer a lower quality at a
lower price.
 The high price may induce suppliers to provide extravagantly
expensive ingredients that would be unprofitable at the lower
market price.
 Consumers would probably just rather have a low-priced good
without the fancy bells and whistles.
 If they were really wanting expensive ingredients, their
preferences would have been reflected in a stronger demand
curve to begin with and the market price would have been
higher.
5. Illegal Activity: Bribery of sellers or government officials.
 Examples of working for less than minimum wage (off the
books) because there is a surplus of labor willing to work.
 Minimum wage laws are an example of price floors. Relatively
high minimum wages in Europe lead to higher levels of
unemployment and black markets in labor. In contrast, the
minimum wage in the United States is set closer to the
equilibrium wage, and labor is relatively more productive in the
United States.
http://www.huffington
post.com/2013/08/21/m
cdonalds-minimumwage_n_3790745.html
Soooo Why Are There Price Floors?
1. Benefit to some producers: Producers
may have the _________ ________to
persuade government that the
equilibrium price is unfairly low.
 This is a ______________argument.
2. Price floors create a persistent
________ of the good.
3. ________ __________: There is also
the temptation to engage in illegal
activity, particularly ________ and
corruption of government officials.
http://www.cbsnews.co
m/8301-250_16257482105/top-15-superpac-donors-throughjune/
Soooo Why Are There Price Floors?
1. Benefit to some producers: Producers
may have the political clout to persuade
government that the equilibrium price is
unfairly low.
 This is a normative argument.
2. Price floors create a persistent surplus
of the good.
3. Black Markets: There is also the
temptation to engage in illegal activity,
particularly bribery and corruption of
government officials.
http://www.cbsnews.co
m/8301-250_16257482105/top-15-superpac-donors-throughjune/
Graphing a Price Floor Husker Style
1.
2.
3.
4.
5.
Farmers in the State of
Nebraska lobby
Congress to pass a bill
that makes sets the
price of corn above
equilibrium price.
Draw the correctly labeled
market for corn, Identify
the original price (3.00) as
Pe and quantity as Qe (4
bushels)
Identify the price control
at $4.00. Label the price
control.
Identify the result of the
price control in terms of
Qd and Qs.
What is the difference
between quantity
demanded and quantity
supplied?
Graphing a Price Floor Husker Style
1.
2.
3.
4.
5.
Farmers in the State of
Nebraska lobby
Congress to pass a bill Price of
Corn
that makes sets the
7
price of corn above
equilibrium price.
6
Draw the correctly labeled
market for corn, Identify
5
the original price (3.00) as
Pe and quantity as Qe (4
bushels)
4
Identify the price control
at $4.00. Label the price
Pe 3
control.
Identify the result of the
2
price control in terms of
Qd and Qs.
1
What is the difference
between quantity
demanded and quantity
0
supplied?
Qd<Qs=
Surplus
S
Price
Floor
D
1
2
3
4
Qe
5
6
7
Quantity
Class Activity ~ Price Controls:
Pro or Con?
 As a class, select a topic of price control
debate that is near to your heart (college
tuition, prescription drugs, etc.)
 You will be assigned a group (pro or
con).
 Select 2 captains, one male one female.
Discuss the advantages and
disadvantages for the consumer,
producer, for men, women, children, old
people, (whoever applies) of the price
control on your product.
 Be prepared to debate the pros & cons.
Keep it clean & fight the good fight!
 Module 8 Review p. 86-87
 Read Module 9 for tomorrow
 Complete Strive for a 5 p.62 – the top of p. 65