understanding equilibrium

2.  In economics, an equilibrium is a situation in which:
 there is no inherent tendency to change,
 quantity demanded equals quantity supplied

3. Equilibrium occurs at a price of $3 and a quantity
of 30 units.

4.  A change in any variable other than price
that influences quantity supplied produces
a shift in the supply curve or a change in
supply.

5. Sellers (number of)
Technology
Expectations
Prices (of other goods)
Inputs (cost of)
Government Regulation &
Taxes

6. 6
 New technology makes it easier to produce a product.
 There is an incentive to produce more of this product at
the current price.
 The supply curve shifts to the right.

7. 7
 Higher input prices (such as labour costs) make it more
costly to produce a good, so less is offered for sale at the
current price.
 That is, the opportunity cost of producing this product
rises – supply falls and the supply curve shifts to the left.

8. TABLE 5
Change in Supply due to an
Increase in DVD Costs
Price Quantity
Demanded
Initial Quantity
Supplied NewQuantity
Supplied
$5 10
50 30
$4 20
40 20
$3 30
30 10
$2 40
20 0
$1 50
10 0

10. Pricing As Signals:
The role of prices is to act as signals for buyers and sellers in the market
Measure of Value
Signal
Flexible
Cost
Choice of g/s
Efficient
• Standard form of measure for g/s
• for excess or shortage: suppliers inc/dec production for profit;
consumers inc/dec spending
• can decrease price to get rid of a surplus
•Can increase price to alleviate shortage problem
• no administrative cost b/c supply and demand determine price
• variety of prices for each g/s
• FOP’s adjust based on demand
• Easily understood (universal language)

11. Government decides everyone’s fair share
 Ex. WWII/ OPEC 1973 Oil Embargo
Problems with Rationing
 Fairness: small shares for everyone
 Diminished incentives: no motivation to work
 Can lead to BLACK MARKET

13. The Economic Model
 Analyzes behaviors
 Predicts outcomes
When Quantity Demanded = Quantity Supplied,
we have a market equilibrium

14. Surplus
Quantity supplied is
more than than
quantity demanded.
Price goes down

15.  A surplus occurs when a good/service is priced
too high
 E.g. the producer wants to sell 50,000 coffees
at $5 and at this price consumers are only
willing to buy 10,000.
 in order to eliminate the surplus producers will
lower the price in order to increase the demand
until they can clear the market.
 this might be at around $4 in the coffee
example.

16.  When Qs>Qd
 Effects:
 cause Price to decrease
 Qd to increase
 Qs to decrease

17. Shortage
Quantity supplied is
less than quantity
demanded.
Price goes up

18.  A shortage occurs when a good/service is priced
too low.
 E.g. if the coffee price was dropped to $3 demand
would increase to 90,000 while
 However at that price producers only willing to
supply 10,000
 then there would be a shortage of 80,000.
 As a result buyers would bid amongst themselves
for the limited supply and price would rise to
eliminate the shortage.

19. $.25
$.15
$.05
Surplus

20.  Shortage
 Qs < Qd
EFFECTS of a Shortage (how to
return to Eq):
1. Increase price
2. Quantity Supplied
increase

21. $.25
$.15
$.05 Shortage

22.  What happens if the price is $1.00?
 What is the market clearing price?
 Define equilibrium
 Show and explain what happens if the price of graphite goes up
 Show and explain what happens if the price of pens goes down
 Define shortage
Price Quantity demanded Quantity Supplied
$0.10 120 10
$0.25 80 30
$0.50 50 50
$1.00 30 100