equilibrium and disequilibrium messere - grade 11 economics cie 3m7
TRANSCRIPT
Equilibrium and Equilibrium and DisequilibriumDisequilibrium
Messere - Grade 11 Economics
CIE 3M7
OutlineOutline
I. IntroductionA. ShortagesB. SurplusesC. Equilibrium
II. Changes in EquilibriumA. Change in DemandB. Change in Supply
III. Disequilibrium - Price ControlsA. Price FloorsB. Price Ceilings
ShortageShortage
• Let’s say that Loony’s uptown decides to sell their CDs for $3 each.
• More than likely there will be a lot more people wanting to buy CDs than Loony’s has to sell.
• Why? Because at such a low price, the quantity demanded is quite high. But Loony’s does not want to sell that many at such a low price.
ShortageShortage
• This situation is called a shortage
• Shortage - when Qd > Qs at current market price.– Amount of Shortage = Qd - Qs
• Note - it is not correct to say Demand exceeds Supply, but rather quantity demanded exceeds quantity supplied.
ShortageShortage
Result of Shortage:
• If you are the manager of Loony’s and you find that you are selling out of CDs at $3, what do you want to do?– Raise the price
• Buyers can’t get all they want. Therefore, competition among buyers drive prices up.
• P will increase
ShortageShortage
P
Q
SCDs
DCDs
0
ShortageShortage
P
Q
SCDs
DCDs
0
Psh
Qs QdAmount of Shortage
Results of ShortageResults of Shortage
P
Q
S
D
0
Psh
Qs Qd
Results of ShortageResults of Shortage
P
Q
S
D
EP*
Q*0
Psh
Qs Qd
SurplusSurplus
• Let’s say that as the manager, you raised the prices of CDs to $20.
• At $20 you would love to sell a lot of CDs, but not a lot of people are willing to pay $20 for a CD.
• So the CDs keep piling up as they come in from your supplier, but they don’t seem to be going out the door in sales.
SurplusSurplus
• This situation is called a surplus
• Surplus - when Qs > Qd at current market price.• Amount of surplus = Qs - Qd
• Note - not correct to say Supply exceeds Demand, but rather that quantity supplied exceeds quantity demanded.
Results of SurplusResults of Surplus
Result of Surplus:
• As manager you have to decide what do with all these CDs that are piling up and not selling. What do you do?– Have a sale!
Results of SurplusResults of Surplus
• Firms have more than they can sell. Therefore, firms lower price to sell the product.
• As price decreases, Qd increases and Qs decreases
• P will decrease
SurplusSurplus
P
Q
SCDs
DCDs
0
SurplusSurplus
P
Q
SCDs
DCDs
0
Psur
Qd Qs
Amount ofSurplus
Results of SurplusResults of Surplus
P
Q
SCDs
DCDs
0
Psur
Qd Qs
Amount ofSurplus
Results of SurplusResults of Surplus
P
Q
SCDs
DCDs
E
P*
Q*0
Psur
Qd Qs
Amount ofSurplus
Equilibrium in the MarketEquilibrium in the Market
• Note that if the price is below P* then there will be a shortage causing price to rise
• If the price is above P* then there will be a surplus causing price to fall
• It’s as if P* is a magnet that keeps drawing price to it (and consequently quantity to Q*)
• This magnet is sometimes called “The Invisible Hand”
Equilibrium in the MarketEquilibrium in the Market
• Equilibrium - where quantity demanded equals quantity supplied.
• Equilibrium Price (P*) - price where equilibrium occurs.
EquilibriumEquilibrium
P
Q
S
D
EP*
Q*0
Equilibrium in the MarketEquilibrium in the Market
What Occurs at Equilibrium
• Demand Side - those who get the good are those willing and able to pay the P*.
• Supply Side - only those firms which are able to produce at or below the cost of P* will remain in business.
Changes in EquilibriumChanges in Equilibrium
• Remember that Supply and Demand are drawn under the ceteris paribus assumption.
• Any factors, other than price, which cause Supply and/or Demand to change will affect equilibrium price and quantity.
Change in DemandChange in Demand• Demand will change for any of the factors
examined previously:– Tastes/Preferences
– Income (Normal/Inferior goods/Y-dist.)
– Price of Substitute/Complimentary goods
– Number of Consumers
– Expectations of price changes
Ceteris paribus, suppose the demand for CDs increased due to an increase in income. How would this affect the market equilibrium price & quantity of CDs?
Increase in DemandIncrease in Demand
P
Q
SCDs
DCDs
0
Increase in DemandIncrease in Demand
P
Q
SCDs
DCDs
EP*
Q*0
D’
E’
Q*’
P*’
Change in SupplyChange in Supply
• Supply will change for any of the factors examined previously:- Technology
- Cost of Resources
- Taxes & Subsidies
- Number of Producers
- Changes in Nature
Ceteris paribus, let’s say that the government lowers taxes on CDs. How would this affect the market equilibrium price & quantity of CDs?
Increase in SupplyIncrease in Supply
P
Q
SCDs
DCDs
0
Increase in SupplyIncrease in Supply
P
Q
SCDs
DCDs
EP*
Q*0
S’
E’P*’
Q*’
The Role of PricesThe Role of Prices
• Convey information– When the price of a Maple Leaf tickets, on
average, increases by 10%, it indicates the popularity of the Maple Leafs
• Rationiong device– The price is what determines who can have the
good– Price acts as a means of allocating the
good/resource to reflect its scarcity value
Market DisequilibriumMarket Disequilibrium
• Is it possible for the price and quantity to NOT be in equilibrium?
• Yes - While the invisible hand may move price towards equilibrium, price controls tend to generate disequilibrium in the marketplace
Price ControlsPrice Controls
There are two types of price controls:
1) Price Ceilings
2) Price Floors
Price CeilingsPrice Ceilings
• Price Ceiling - sets a maximum price that is allowed by law.
• Result of Price Ceiling:– Stay at a permanent shortage situation
• Note that a price ceiling can be any price the government chooses. It is, however only effective if it is below the equilibrium price
Price CeilingPrice Ceiling
• Example of Price Ceiling• Rent controlled apartments
• In New York City, San Francisco, Boston, and other cities the city or state determines the maximum amount that can be charged for rent on many apartments.
• A maximum price is a price ceiling
Rent Controlled ApartmentsRent Controlled Apartments
P
Q
S
D
0
Rent Controlled ApartmentsRent Controlled Apartments
P
Q
S
D
P*
Q*0
Rent Controlled ApartmentsRent Controlled Apartments
P
Q
S
D
P*
Q*0
Pceiling
Qs QdAmount of Shortage
Winners and LosersWinners and Losers
Who gains and loses with price ceilings?
1. Benefit - those who get rent controlled apartments
2. Loses - those who can’t find apartments due to the shortage.
3. Loses - landlords who must accept lower rent.
Price FloorsPrice Floors
• Price Floor - sets a minimum price that is allowed by law.
• Result of Price Floor• Stay at a permanent surplus situation
• Note that a price floor can be set at any price, but is only effective if it is above the equilibrium price
Price FloorsPrice Floors
• Example of Price Floor• Minimum Wage Legislation
• The minimum wage is a lowest price the government will allow firms to pay for labor.
• A minimum price is a price floor
Price FloorsPrice Floors
• When we look at the labor market it is similar to other supply and demand diagrams except for the labels.• L - quantity of workers• w - wages (the price we pay workers)
• It is also different because the suppliers of labor are households, not firms, and the demanders of labor are firms, not households
Minimum Wage LegislationMinimum Wage Legislation
Wage
# of Workers
S
D
0
Minimum Wage LegislationMinimum Wage Legislation
Wage
# of Workers
S
D
w*
L*0
Minimum Wage LegislationMinimum Wage Legislation
Wage
# of Workers
S
D
w*
L*0
wfloor
Ld Ls
Amount of Unemployed Workers
Winners and LosersWinners and Losers
Who gains and loses with price floors?
1. Benefit - those who get higher wages
2. Loses - those who can’t find jobs at the higher wage
3. Loses - firms who must pay higher wages.
Practice Test Link
Further PracticeFurther Practice
• Take a sheet of paper out and number it from 1 to 5.
• For each question indicate whether:
- price increased, decreased or it was indeterminate (impossible to determine)
- quantity increased, decreased or it was indeterminate (impossible to determine)