equilibrium and disequilibrium. outline i. introduction a. shortages b. surpluses c. equilibrium

Equilibrium and Equilibrium and DisequilibriumDisequilibrium

OutlineOutline

I. IntroductionI. IntroductionA. ShortagesA. Shortages

B. SurplusesB. Surpluses

C. EquilibriumC. Equilibrium

Outline (Cont.)Outline (Cont.)

II. Changes in EquilibriumII. Changes in EquilibriumA. Change in DemandA. Change in Demand

B. Change in SupplyB. Change in Supply

C. Change in Both Demand and SupplyC. Change in Both Demand and Supply

III. DisequilibriumIII. DisequilibriumA. Price FloorsA. Price Floors

B. Price Ceilings B. Price Ceilings

ShortageShortage

• Let’s say that Loony’s uptown decides to Let’s say that Loony’s uptown decides to sell their CDs for $3 each.sell their CDs for $3 each.

• More than likely there will be a lot more More than likely there will be a lot more people wanting to buy CDs than Loony’s people wanting to buy CDs than Loony’s has to sell.has to sell.

• Why? Because at such a low price, the Why? Because at such a low price, the quantity demanded is quite high. But quantity demanded is quite high. But Loony’s does not want to sell that many Loony’s does not want to sell that many at such a low price.at such a low price.

ShortageShortage

• This situation is called a This situation is called a shortageshortage

• ShortageShortage - when Q - when Qdd > Q > Qss at current at current market price.market price.– Amount of Shortage = QAmount of Shortage = Qdd - Q - Qss

• Note - it is Note - it is not not correctcorrect to say Demand to say Demand exceeds Supply, but rather quantity exceeds Supply, but rather quantity demanded exceeds quantity supplied.demanded exceeds quantity supplied.

ShortageShortage

Result of ShortageResult of Shortage::

• If you are the manager of Loony’s and you If you are the manager of Loony’s and you find that you are selling out of CDs at $3, find that you are selling out of CDs at $3, what do you want to do?what do you want to do?– Raise the priceRaise the price

• Buyers can’t get all they want. Therefore, Buyers can’t get all they want. Therefore, competition among buyers drive prices competition among buyers drive prices up.up.

• P will increaseP will increase

ShortageShortage

Qs QdAmount of Shortage

Results of ShortageResults of Shortage

SurplusSurplus

• Let’s say that as the manager, you Let’s say that as the manager, you raised the prices of CDs to $20.raised the prices of CDs to $20.

• At $20 you would love to sell a lot of At $20 you would love to sell a lot of CDs, but not a lot of people are willing CDs, but not a lot of people are willing to pay $20 for a CD.to pay $20 for a CD.

• So the CDs keep piling up as they come So the CDs keep piling up as they come in from your supplier, but they don’t in from your supplier, but they don’t seem to be going out the door in sales.seem to be going out the door in sales.

SurplusSurplus

• This situation is called a This situation is called a surplussurplus

• SurplusSurplus - when Q - when Qss > Q > Qdd at current at current market price.market price.• Amount of surplus = QAmount of surplus = Qss - Q - Qdd

• Note - Note - not not correctcorrect to say Supply exceeds to say Supply exceeds Demand, but rather that quantity Demand, but rather that quantity supplied exceeds quantity demanded. supplied exceeds quantity demanded.

Results of SurplusResults of Surplus

Result of Surplus:Result of Surplus:

• As manager you have to decide what As manager you have to decide what do with all these CDs that are piling do with all these CDs that are piling up and not selling. What do you do?up and not selling. What do you do?– Have a sale!Have a sale!

• Firms have more than they can sell. Firms have more than they can sell. Therefore, firms lower price to sell Therefore, firms lower price to sell the product.the product.

• As price decreases, QAs price decreases, Qdd increases and increases and QQss decreases decreases

• P will decrease P will decrease

SurplusSurplus

Amount ofSurplus

Equilibrium in the MarketEquilibrium in the Market

• Note that if the price is below P* then there Note that if the price is below P* then there will be a shortage causing price to risewill be a shortage causing price to rise

• If the price is above P* then there will be a If the price is above P* then there will be a surplus causing price to fallsurplus causing price to fall

• It’s as if P* is a magnet that keeps drawing It’s as if P* is a magnet that keeps drawing price to it (and consequently quantity to Q*)price to it (and consequently quantity to Q*)

• This magnet is sometimes called “The This magnet is sometimes called “The Invisible Hand”Invisible Hand”

• EquilibriumEquilibrium - where quantity - where quantity demanded equals quantity supplied.demanded equals quantity supplied.

• Equilibrium PriceEquilibrium Price (P*) - price where (P*) - price where equilibrium occurs.equilibrium occurs.

EquilibriumEquilibrium

What Occurs at EquilibriumWhat Occurs at Equilibrium

• Demand Side - those who get the Demand Side - those who get the good are those good are those willing and ablewilling and able to to pay the P*.pay the P*.

• Supply Side - only those firms which Supply Side - only those firms which are able to produce at or below the are able to produce at or below the cost of P* will remain in business.cost of P* will remain in business.

Changes in EquilibriumChanges in Equilibrium

• Remember that Supply and Demand Remember that Supply and Demand are drawn under the ceteris paribus are drawn under the ceteris paribus assumption.assumption.

• Any factors which cause Supply Any factors which cause Supply and/or Demand to change will affect and/or Demand to change will affect equilibrium price and quantity.equilibrium price and quantity.

Change in DemandChange in Demand

• Demand will change for any of the Demand will change for any of the factors discussed previously.factors discussed previously.

• For instance, let’s say the demand For instance, let’s say the demand for CDs increased due to an increase for CDs increased due to an increase in incomein income

Increase in DemandIncrease in Demand

E’P*’

Change in SupplyChange in Supply

• Supply will change for any of the Supply will change for any of the factors discussed previously.factors discussed previously.

• For instance, let’s say that the For instance, let’s say that the government lowers taxes on CDsgovernment lowers taxes on CDs

Increase in SupplyIncrease in Supply

Changes in Demand and Changes in Demand and SupplySupplyTo determine the impact of both supply and To determine the impact of both supply and

demand changing:demand changing:

• First examine what happens to First examine what happens to equilibrium price and quantity when just equilibrium price and quantity when just demand shifts.demand shifts.

• Second, examine what happens to Second, examine what happens to equilibrium price and quantity when just equilibrium price and quantity when just supply changessupply changes

• Finally, add the two effects together.Finally, add the two effects together.

Changes in Demand and Changes in Demand and SupplySupplyGeneral Results:General Results:

• When supply and demand move in the When supply and demand move in the same directionsame direction• It is difficult to determine Equilibrium price It is difficult to determine Equilibrium price

from the original Equilibrium point.from the original Equilibrium point.

• When supply and demand move in When supply and demand move in opposite directionsopposite directions• It is difficult to determine Equilibrium quantity It is difficult to determine Equilibrium quantity

from the original Equilibrium point.from the original Equilibrium point.

Increase in Supply and Increase in Supply and DemandDemand

E’P*’

E’P*’=

equilibrium and disequilibrium. outline i. introduction a. shortages b. surpluses c. equilibrium

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