EQUILIBRIUM, PRICE
CONTROLS, & ELASTICITY
SSEMI2c, 3b:
Explain and illustrate the effects of
price floors and ceilings.
Equilibrium Price
The intersection of supply and demand
Where Demand and Supply Meet



Equilibrium is the point where
Demand and Supply cross
Market equilibrium determines the
price
At this price Qs = Qd
 Everyone
prepared to buy at that
price gets what they want and
everyone prepared to sell at that
price does.
Market Equilibrium
Market equilibrium Price
occurs where Qd = Qs
P
s
•
This occurs at Pe.
At this price, the market
quantity, Qd and Qs, are the
same (Qe).
Pe
Equilibrium is a state of
balance. There are no
shortages or surpluses.
d
Q
Qe
Changes to equilibrium
*A change to any of the variables that cause a shift in
either demand or supply will cause a change in the
equilibrium price and quantity. *
Factors that shift the demand curve
• N*I*C*E*S*T
Factors that shift the supply curve
• S*T*E*P*I*N*G
Example – Changes in Demand
An increase in demand
caused by an increase
in consumer incomes
Price
($)
At the new
equilibrium
prices have
increased
and quantity
has
increased
s
P1
Pe
d
d'
Q
Qe
Q1
Example – Changes in Supply
s’
s
Price
($)
A decrease in supply
caused by cost of
production increasing
Pe’
Pe
d
Qe’
Qe
At the new
equilibrium price
has increased
and quantity has
decreased
Excess Supply (Surplus)
s
P
At price p* quantity demanded
(Qd) is less than quantity
supplied (Qs).
There is an oversupply or
surplus. (of Qs - Qd)
P*
The market is in disequilibrium
and is not stable.
Market forces ( excess supply)
will tend to force prices down.
d
0
Qd
Qs
Q
Excess Demand (Shortage)
At price P* quantity
demanded is greater than
quantity supplied.
S
P
There are shortages, not
enough supply to meet
demand
The excess demand tends to
push prices up.
P*
D
0
Qs
Qd
Q
Price Controls
11
PRICE CONTROLS
Who likes the idea of having a price ceiling on
gas so prices will never go over $1 per gallon?
Price floors and ceilings

One common way to achieve social goals is to have
the government set prices at “socially desirable”
levels.
Price Ceiling
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
P
Gasoline
S
$5
Does this
policy help
consumers?
Result:
BLACK
MARKETS
To have an effect,
a price ceiling must be
Price
Ceiling
below equilibrium
Shortage
4
3
2
(Qd>Qs)
1
o
10
20
30
40
D
50
60
70
80
Q
13
Shortage

Shortage: a situation where the Qd > Qs
(at a given price)
Example of Price Ceiling



Some cities like New
York, have rent controls.
In some buildings a
certain percentage of
apartments must be
offered at a very low
price.
This creates a surplus of
people wanting these
apartments.
Price Floor
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
P
Corn
S
$
Surplus
(Qd<Qs)
To have an effect,
Price Floor
a price floor must be
Does this above equilibrium
4
3
policy help
corn
producers?
2
1
o
D
10
20
30
40
50
60
70
80
Q
16
Price Floors create a Surplus


Surplus: a situation in which Qs > Qd (at a given
price)
Result: Suppliers have extra goods and services.
Example of Price Floor


Minimum wage – the least amount an employer can
pay a worker
Price Floors create a surplus of workers, leaving
many people without a job.
Price Controls
…. A short story
Moving on to Elasticity……
Elasticity of Demand

•

Elasticity of DemandMeasurement of consumers responsiveness to a
change in price.
Firms must ask: What will happen if price
increase? How much will it effect Quantity
Demanded?
Who cares?
•
Elasticity is used by businesses to help determine
market prices.
Inelastic demand….

INelastic = Insensitive to a change in price.
 If
price increases, quantity demanded will fall a little
 If price decreases, quantity demanded increases a
little.
 In other words, people will continue to buy it.
Inelastic demand….

General Characteristics of INelastic Goods:
 Few
Substitutes
 The products are necessities
 Required now, rather than later

Examples: Medical care, chewing gum
Elastic Demand…

Elastic = Sensitive to a change in price.
If price increases, Qd will fall a lot
 If price decreases, Qd increases a lot.
 In other words, the amount people buy is sensitive to
price.

Elastic Demand….

General Characteristics of Elastic Goods:
 Many




Substitutes
Luxuries
Large portion of income
Plenty of time to decide
Examples: soda, boats
Elastic vs. Inelastic

To determine if a product is elastic or inelastic you
will ask yourself 3 questions:
 Can
the purchase be delayed?
 Is the product a large portion of my income?
 Are their substitutes?

If you can answer “yes” to 2 or more, the
product/service is considered elastic.
Elastic or Inelastic?
BeefGasolineReal EstateMedical CareElectricityGold-
Elastic
INelastic
Elastic
Inelastic
INelastic
Elastic
What about the demand for
insulin for diabetics?
Price Elasticity of Supply

Price elasticity of supply is a measure of how much
the quantity supplied of a good responds to a
change in the price of that good.
1.
Ability of sellers to change the amount of the
good they produce.
 Beach-front
land is inelastic.
 Books, cars, or manufactured goods are elastic.
2.
Time period
 Supply
is more elastic in the long run.