Today
Market Equilibrium
How shifts in demand and supply affect the
market equilibrium
Price floors & price ceilings
The Market for Cheese
Two main questions:
What will be the price of cheese?
How much will be exchanged?
The Equilibrium Condition
The Equilibrium Condition: In order for the price
and the quantity exchanged to remain
unchanged, the QD must equal the QS.
Note: If D or S shift, then this will lead to a new
equilibrium.
Market Equilibrium, Graph
Price
($/lb.)
S
4
P*=3
The equilibrium
price, where QD
= QS, is $3. The
equilibrium Q is
200 lbs.
2
1
D
0
0
100 Q*=
300 400 Quantity
(lb.per week)
Why Equilibrium?
Excess demand or shortage: when QD > QS, at a
particular price.
Excess supply or surplus: when QS > QD, at a
particular price.
An observation: Excess demand causes P to
rise. Excess supply causes P to fall.
Equilibrium: No excess demand, no excess
supply. Stable price.
Market Equilibrium, Graph
Price
($/lb.)
S
What if P=$4?
What if P=$2?
4
P*=3
2
1
D
0
0
100 Q*=
300 400 Quantity
(lb.per week)
Market for Sunflower Seeds
Price
($/lb.)
S
4
3
2
1
Where is the
initial equ.?
What if a new
s.s. diet
becomes
fashionable?
D
0
0
100 200 300 400
Quantity(lb.per week)
Sunflower Seed Diet is Fad
Price
($/lb.)
S
4
3
2
D’
1
Why does D
shift?
What happens
to equ. P & Q?
Does this make
sense?
D
0
0
100 200 300 400
Quantity(lb.per week)
Description of Events
“The demand for sunflower seeds increased,
which pushed up the price of sunflower seeds,
increasing the quantity supplied.”
A Closer Look at Adjustment
Price
($/lb.)
S
P0
D’
D
QS
What drives
P upward?
QD>QS
Shortage at
P0.
Price will
rise.
QD
Quantity(lb.per week)
A Closer Look at Adjustment
Price
($/lb.)
S
P1
P0
D’
As the price
rises, QD will
fall & QS will
rise.
Shortage
gone at P1.
D
QS
Q
QD
Quantity(lb.per week)
Market for Corn
Price
($/bu.)
S
What if the price
of soybean oil
rises?
Consider
changes to both
D & S.
D
Quantity(bu. per year)
Market for Corn
S’
Price
($/bu)
S
P1
P0
D’
D
Q1 Q0
P of soybean oil
rises.
Why does S
shift?
Why does D
shift?
Quantity(bushels per year)
Simultaneous Changes in D & S
The ultimate effect on equ. P & Q will depend on
how much D shifts relative to the shift in S.
In our example, price must rise, but quantity
exchanged might rise or falls depending on
which effect is stronger.
Experiment on your own with various
combinations of D & S changes!
Price Controls
When the gov’t sets a legal min. or max. price.
Price Floor: a legal minimum price. (Not
allowed to charge less than $___.)
Note: If it is set below the equilibrium price, will
not affect the market. Said to be “nonbinding”.
We focus on binding price floors.
Price Floor
Price
S
PFloor
D
QD
QS
Quantity
QS> QD
Surplus
created by
law.
What Q is
exchanged?
Effects of Price Floor
With a price floor, there is a surplus. W/O the
law, the price would fall, eliminating the surplus.
Minimum Wage Laws
Sets a minimum price of labor.
Binding Minimum Wage Laws
Wage
S
WageFloor
D
QD
QS
Firm are
demanders of L.
Workers are
suppliers of L.
Wage is price.
What do we call a
surplus of L?
Labor Hours
Is the current min. wage law binding?
How can you tell?
Binding Minimum Wage Laws
Goal: Give lowest-skilled workers an abovemarket wage.
Effects:
Those with jobs get higher income.
Fewer jobs available, harder to find jobs.
Employers may discriminate more easily.
Minimum Wage Effects, Cont’d.
Winners
Those who keep job (they earn more per hour).
Losers
Workers who lose their job (or get hours cut).
Workers who can’t find work.
Employers (pay higher wage, can’t afford as many
workers).
Price Ceiling
Price Ceiling: a legal maximum price.
Price Ceiling
Price
S
PCeiling
D
QS
QD
Quantity
QD> QS
Shortage
created by
law.
What Q is
exchanged?
Coming Up:
Begin Ch. 18, elasticity
Group Work: Changes in Market
Equilibrium
For each scenario, address the following:
Does demand or supply shift?
Which direction does it shift?
Draw the new curve on the graph on properly label it.
Indicate the new equilibrium price & quantity.
Explain what happened in this market in complete
sentences.
Market for Clothing
Price
/item
There is a
recession.
S
P0
D
Q0
Items per week
Market for strawberries
Price
($/lb.)
S
P0
D
Q0
What if the price
of cabbage
rises?
Hint: farmers
can plant either
one in the same
fields.
Quantity(lb. Strawb. per week)
Market for Yogurt
Price
($/tub.)
S
P0
What if the price
of live yogurt
cultures falls?
Hint: Live
cultures are
needed to make
yogurt.
D
Q0
Quantity(tubs per week)