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Lesson 8--equilibrium[1]


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Lesson 8--equilibrium[1]

  1. 1. EquilibriumAcademic Decathlon—Lesson 8 Berryhill Economics
  2. 2. Equilibrium Equilibrium is a state of balance. Market equilibrium is when the quantity demanded is equal to quantity supplied. There is no tendency for change at equilibrium. The markets naturally tend towards equilibrium.
  3. 3. Equilibrium
  4. 4. Equilibrium The equilibrium point is where the two graphs meet. At this point, Qd = Qs. QE represents the quantity demanded and supplied at equilibrium. PE represents the price at equilibrium. The market will operate at equilibrium. However, if something shifts the demand or supply curves, the equilibrium P and Q will change.
  5. 5. Equilibrium The market wants to operate at equilibrium. It’s similar to an atom that gives or receives electrons to become balanced. That’s what the market does, supply and demand will adjust and try to find equilibrium naturally. The market will always move itself to equilibrium, ceteris paribus.
  6. 6. Surplus and Shortage Sometimes the price for an item isn’t at equilibrium. Either sellers have mistakenly put too high a price or too low a price onto a product. The price system will adjust itself to get back to equilibrium on it its own. The price, Qs and Qd all act as signals to consumers and producers until the market finds the correct price.
  7. 7. Surplus and Shortage Let’s say the market price is set above equilibrium:
  8. 8. Surplus and Shortage If price is above equilibrium price, Qs will be higher than Qd. That means there will be lots of stuff left on the shelf because people don’t want to buy the product for that high of a price. This is called a surplus. A surplus is a situation of excess supply in a market (Qd < Qs).
  9. 9. Surplus and Shortage As suppliers begin to incur losses because they are producing more items than are selling, they will start lowering prices (sale!) If the price is lower, more people will buy the product, so there is an increase in Qd If the price is lower, producers will respond by supplying less (decrease Qs)
  10. 10. Surplus and Shortage This will go on, little by little, until equilibrium is reached and Qd = Qs
  11. 11. Surplus and Shortage The opposite will occur when price is less than equilibrium price:
  12. 12. Surplus and Shortage If the price is set below equilibrium, Qd>Qs (demand is higher than supply), this is called a shortage. A shortage is a situation of too little supply in a market (Qd > Qs) If the market was to stay here, buyers will being to outbid each other to get the product (think of Tickle-Me Elmo).
  13. 13. Surplus and Shortage As the price goes up, producers will increase production (increase Qs) As the price goes up, buyers will decrease their quantity demanded (decrease Qd)
  14. 14. Surplus and Shortage This will go on, little by little, until equilibrium is reached:
  15. 15. Prices as Signals This shows that prices—the monetary value of a product as established by supply and demand—is a signal that helps us make our economic decisions.
  16. 16. Prices as Signals Advantages:  Prices in a competitive market economy are neutral because they favor neither the producer nor the consumer.  Prices in a market economy are flexible. This allows the price system to absorb unexpected shocks and accommodate change.  Prices have no cost of administration.  Prices are familiar to us all, allowing decisions to be made quickly and easily.
  17. 17. Price as Signal How would we distribute and allocate goods and services without prices? Rationing—a system under which an agency such as government decides everyone’s “fair” share Lottery? Anarchy?
  18. 18. Rationing Rationing is the most used allocation system that does not use prices Problems with rationing:  Fairness—who deserves how much?  High administrative cost  Diminishing incentive—people do not have as much motivation to work or produce