Equilibrium andEquilibrium andDisequilibriumDisequilibrium
OutlineOutlineI. IntroductionA. ShortagesB. SurplusesC. Equilibrium
Outline (Cont.)Outline (Cont.)II. Changes in EquilibriumA. Change in DemandB. Change in SupplyC. Change in Both Demand and...
ShortageShortage• Let’s say that Loony’s uptown decides tosell their CDs for $3 each.• More than likely there will be a lo...
ShortageShortage• This situation is called a shortage• Shortage - when Qd > Qs at current marketprice.– Amount of Shortage...
ShortageShortageResult of Shortage:• If you are the manager of Loony’s and youfind that you are selling out of CDs at $3,w...
ShortageShortage
ShortageShortagePQ0
ShortageShortagePQD0
ShortageShortagePQSD0
ShortageShortagePQSD0PshQs QdAmount of Shortage
Results of ShortageResults of ShortagePQSD0PshQs Qd
Results of ShortageResults of ShortagePQSDEP*Q*0PshQs Qd
SurplusSurplus• Let’s say that as the manager, you raised theprices of CDs to $20.• At $20 you would love to sell a lot of...
SurplusSurplus• This situation is called a surplus• Surplus - when Qs > Qd at current marketprice.• Amount of surplus = Qs...
Results of SurplusResults of SurplusResult of Surplus:• As manager you have to decide what dowith all these CDs that are p...
Results of SurplusResults of Surplus• Firms have more than they can sell.Therefore, firms lower price to sell theproduct.•...
SurplusSurplus
SurplusSurplusPQ0
SurplusSurplusPQS0
SurplusSurplusPQSD0
SurplusSurplusPQSD0PsurQd QsAmount ofSurplus
Results of SurplusResults of SurplusPQSD0PsurQd QsAmount ofSurplus
Results of SurplusResults of SurplusPQSDEP*Q*0PsurQd QsAmount ofSurplus
Equilibrium in the MarketEquilibrium in the Market• Note that if the price is below P* then therewill be a shortage causin...
Equilibrium in the MarketEquilibrium in the Market• Equilibrium - where quantity demandedequals quantity supplied.• Equili...
EquilibriumEquilibriumPQSDEP*Q*0
Equilibrium in the MarketEquilibrium in the MarketWhat Occurs at Equilibrium• Demand Side - those who get the good arethos...
Changes in EquilibriumChanges in Equilibrium• Remember that Supply and Demand aredrawn under the ceteris paribus assumptio...
Change in DemandChange in Demand• Demand will change for any of the factorsdiscussed previously.• For instance, let’s say ...
Increase in DemandIncrease in Demand
Increase in DemandIncrease in DemandPQ0
Increase in DemandIncrease in DemandPQ0D
Increase in DemandIncrease in DemandPQSD0
Increase in DemandIncrease in DemandPQSDEP*Q*0
Increase in DemandIncrease in DemandPQSDEP*Q*0D’
Increase in DemandIncrease in DemandPQSDEP*Q*0D’E’P*’Q*’
Change in SupplyChange in Supply• Supply will change for any of the factorsdiscussed previously.• For instance, let’s say ...
Increase in SupplyIncrease in Supply
Increase in SupplyIncrease in SupplyPQ0
Increase in SupplyIncrease in SupplyPQD0
Increase in SupplyIncrease in SupplyPQSD0
Increase in SupplyIncrease in SupplyPQSDEP*Q*0
Increase in SupplyIncrease in SupplyPQSDEP*Q*0S’
Increase in SupplyIncrease in SupplyPQSDEP*Q*0S’P*’Q*’E’
Changes in Demand and SupplyChanges in Demand and SupplyTo determine the impact of both supply anddemand changing:• First ...
Changes in Demand and SupplyChanges in Demand and SupplyGeneral Results:• When supply and demand move in the samedirection...
Increase in Supply and DemandIncrease in Supply and Demand
Increase in Supply and DemandIncrease in Supply and DemandPQ0
Increase in Supply and DemandIncrease in Supply and DemandPQS0
Increase in Supply and DemandIncrease in Supply and DemandPQSD0
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’S’
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’E’P*’Q*’S’
Increase in Supply and DemandIncrease in Supply and Demand
Increase in Supply and DemandIncrease in Supply and DemandPQ0
Increase in Supply and DemandIncrease in Supply and DemandPQD0
Increase in Supply and DemandIncrease in Supply and DemandPQSD0
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0S’
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’S’
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’E’P*’Q*’S’
Increase in Supply and DemandIncrease in Supply and Demand
Increase in Supply and DemandIncrease in Supply and DemandPQ0
Increase in Supply and DemandIncrease in Supply and DemandPQS0
Increase in Supply and DemandIncrease in Supply and DemandPQSD0
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0S’
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’S’
Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’E’P*’=Q*’S’
The Role of PricesThe Role of Prices• Convey information– When “Tickle Me Elmo”s went up in priceform about $30 to $300 th...
Rationing DevicesRationing Devices• What are other rationing devices?– First Come-First Served– Alphabetical– The governme...
Disequilibrium BehaviorDisequilibrium Behavior• Is it possible for the price and quantity toNOT be in equilibrium?• Yes - ...
The Invisible FootThe Invisible Foot• This is government interference with pricesin the market.• The government does this ...
Price ControlsPrice ControlsThere are two types of price controls - PriceCeilings and Price Floors
Price CeilingsPrice Ceilings• Price Ceiling - sets a maximum price that isallowed by law.• Result of Price Ceiling:– Stay ...
Price CeilingPrice Ceiling• Example of Price Ceiling• Rent controlled apartments• In New York City, San Francisco, Boston,...
Rent Controlled ApartmentsRent Controlled Apartments
Rent Controlled ApartmentsRent Controlled ApartmentsPQ0
Rent Controlled ApartmentsRent Controlled ApartmentsPQS0
Rent Controlled ApartmentsRent Controlled ApartmentsPQSD0
Rent Controlled ApartmentsRent Controlled ApartmentsPQSDP*Q*0
Rent Controlled ApartmentsRent Controlled ApartmentsPQSDP*Q*0PceilingQs QdAmount of Shortage
Winners and LosersWinners and LosersWho gains and loses with price ceilings:• 1. Benefit - those who get rent controlledap...
Price FloorsPrice Floors• Price Floor - sets a minimum price that isallowed by law.• Result of Price Floor• Stay at a perm...
Price FloorsPrice Floors• Example of Price Floor• Minimum Wage Legislation• The minimum wage is a lowest price thegovernme...
Price FloorsPrice Floors• When we look at the labor market it issimilar to other supply and demanddiagrams except for the ...
Winners and LosersWinners and LosersWho gains and loses with price floors:• 1. Benefit - those who get higher wages• 2. Lo...
Minimum Wage LegislationMinimum Wage Legislation
Minimum Wage LegislationMinimum Wage LegislationWage# of Workers0
Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersS0
Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersSD0
Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersSDw*L*0
Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersSDw*L*0wfloorLd LsAmount of UnemployedWorkers
Invisible HandshakeInvisible Handshake• The Invisible Handshake is social pressurethat often prevents price from reachinge...
Invisible HandshakeInvisible Handshake• What does that say about the price of thetickets?• Were the tickets priced below o...
Invisible HandshakeInvisible Handshake• Another example of the InvisibleHandshake is with transplant organs• There are not...
Rationing DevicesRationing Devices• When a market it out of equilibrium, priceis not always working as a rationing device....
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Equilibrium

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Equilibrium

  1. 1. Equilibrium andEquilibrium andDisequilibriumDisequilibrium
  2. 2. OutlineOutlineI. IntroductionA. ShortagesB. SurplusesC. Equilibrium
  3. 3. Outline (Cont.)Outline (Cont.)II. Changes in EquilibriumA. Change in DemandB. Change in SupplyC. Change in Both Demand and SupplyIII. DisequilibriumA. Price FloorsB. Price Ceilings
  4. 4. ShortageShortage• Let’s say that Loony’s uptown decides tosell their CDs for $3 each.• More than likely there will be a lot morepeople wanting to buy CDs than Loony’shas to sell.• Why? Because at such a low price, thequantity demanded is quite high. ButLoony’s does not want to sell that many atsuch a low price.
  5. 5. ShortageShortage• This situation is called a shortage• Shortage - when Qd > Qs at current marketprice.– Amount of Shortage = Qd - Qs• Note - it is not correct to say Demandexceeds Supply, but rather quantitydemanded exceeds quantity supplied.
  6. 6. ShortageShortageResult of Shortage:• If you are the manager of Loony’s and youfind 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
  7. 7. ShortageShortage
  8. 8. ShortageShortagePQ0
  9. 9. ShortageShortagePQD0
  10. 10. ShortageShortagePQSD0
  11. 11. ShortageShortagePQSD0PshQs QdAmount of Shortage
  12. 12. Results of ShortageResults of ShortagePQSD0PshQs Qd
  13. 13. Results of ShortageResults of ShortagePQSDEP*Q*0PshQs Qd
  14. 14. SurplusSurplus• Let’s say that as the manager, you raised theprices 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 infrom your supplier, but they don’t seem tobe going out the door in sales.
  15. 15. SurplusSurplus• This situation is called a surplus• Surplus - when Qs > Qd at current marketprice.• Amount of surplus = Qs - Qd• Note - not correct to say Supply exceedsDemand, but rather that quantity suppliedexceeds quantity demanded.
  16. 16. Results of SurplusResults of SurplusResult of Surplus:• As manager you have to decide what dowith all these CDs that are piling up and notselling. What do you do?– Have a sale!
  17. 17. Results of SurplusResults of Surplus• Firms have more than they can sell.Therefore, firms lower price to sell theproduct.• As price decreases, Qd increases and Qsdecreases• P will decrease
  18. 18. SurplusSurplus
  19. 19. SurplusSurplusPQ0
  20. 20. SurplusSurplusPQS0
  21. 21. SurplusSurplusPQSD0
  22. 22. SurplusSurplusPQSD0PsurQd QsAmount ofSurplus
  23. 23. Results of SurplusResults of SurplusPQSD0PsurQd QsAmount ofSurplus
  24. 24. Results of SurplusResults of SurplusPQSDEP*Q*0PsurQd QsAmount ofSurplus
  25. 25. Equilibrium in the MarketEquilibrium in the Market• Note that if the price is below P* then therewill be a shortage causing price to rise• If the price is above P* then there will be asurplus causing price to fall• It’s as if P* is a magnet that keeps drawingprice to it (and consequently quantity to Q*)• This magnet is sometimes called “TheInvisible Hand”
  26. 26. Equilibrium in the MarketEquilibrium in the Market• Equilibrium - where quantity demandedequals quantity supplied.• Equilibrium Price (P*) - price whereequilibrium occurs.
  27. 27. EquilibriumEquilibriumPQSDEP*Q*0
  28. 28. Equilibrium in the MarketEquilibrium in the MarketWhat Occurs at Equilibrium• Demand Side - those who get the good arethose willing and able to pay the P*.• Supply Side - only those firms which areable to produce at or below the cost of P*will remain in business.
  29. 29. Changes in EquilibriumChanges in Equilibrium• Remember that Supply and Demand aredrawn under the ceteris paribus assumption.• Any factors which cause Supply and/orDemand to change will affect equilibriumprice and quantity.
  30. 30. Change in DemandChange in Demand• Demand will change for any of the factorsdiscussed previously.• For instance, let’s say the demand for CDsincreased due to an increase in income
  31. 31. Increase in DemandIncrease in Demand
  32. 32. Increase in DemandIncrease in DemandPQ0
  33. 33. Increase in DemandIncrease in DemandPQ0D
  34. 34. Increase in DemandIncrease in DemandPQSD0
  35. 35. Increase in DemandIncrease in DemandPQSDEP*Q*0
  36. 36. Increase in DemandIncrease in DemandPQSDEP*Q*0D’
  37. 37. Increase in DemandIncrease in DemandPQSDEP*Q*0D’E’P*’Q*’
  38. 38. Change in SupplyChange in Supply• Supply will change for any of the factorsdiscussed previously.• For instance, let’s say that the governmentlowers taxes on CDs
  39. 39. Increase in SupplyIncrease in Supply
  40. 40. Increase in SupplyIncrease in SupplyPQ0
  41. 41. Increase in SupplyIncrease in SupplyPQD0
  42. 42. Increase in SupplyIncrease in SupplyPQSD0
  43. 43. Increase in SupplyIncrease in SupplyPQSDEP*Q*0
  44. 44. Increase in SupplyIncrease in SupplyPQSDEP*Q*0S’
  45. 45. Increase in SupplyIncrease in SupplyPQSDEP*Q*0S’P*’Q*’E’
  46. 46. Changes in Demand and SupplyChanges in Demand and SupplyTo determine the impact of both supply anddemand changing:• First examine what happens to equilibriumprice and quantity when just demand shifts.• Second, examine what happens toequilibrium price and quantity when justsupply changes• Finally, add the two effects together.
  47. 47. Changes in Demand and SupplyChanges in Demand and SupplyGeneral Results:• When supply and demand move in the samedirection• Equilibrium price is ambiguous• When supply and demand move in oppositedirections• Equilibrium quantity is ambiguous
  48. 48. Increase in Supply and DemandIncrease in Supply and Demand
  49. 49. Increase in Supply and DemandIncrease in Supply and DemandPQ0
  50. 50. Increase in Supply and DemandIncrease in Supply and DemandPQS0
  51. 51. Increase in Supply and DemandIncrease in Supply and DemandPQSD0
  52. 52. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0
  53. 53. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’
  54. 54. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’S’
  55. 55. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’E’P*’Q*’S’
  56. 56. Increase in Supply and DemandIncrease in Supply and Demand
  57. 57. Increase in Supply and DemandIncrease in Supply and DemandPQ0
  58. 58. Increase in Supply and DemandIncrease in Supply and DemandPQD0
  59. 59. Increase in Supply and DemandIncrease in Supply and DemandPQSD0
  60. 60. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0
  61. 61. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0S’
  62. 62. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’S’
  63. 63. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’E’P*’Q*’S’
  64. 64. Increase in Supply and DemandIncrease in Supply and Demand
  65. 65. Increase in Supply and DemandIncrease in Supply and DemandPQ0
  66. 66. Increase in Supply and DemandIncrease in Supply and DemandPQS0
  67. 67. Increase in Supply and DemandIncrease in Supply and DemandPQSD0
  68. 68. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0
  69. 69. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0S’
  70. 70. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’S’
  71. 71. Increase in Supply and DemandIncrease in Supply and DemandPQSDEP*Q*0D’E’P*’=Q*’S’
  72. 72. The Role of PricesThe Role of Prices• Convey information– When “Tickle Me Elmo”s went up in priceform about $30 to $300 this past Christmas, ittold us something about the popularity of thedoll• Rationiong device– The price is what determines who can have thegood
  73. 73. Rationing DevicesRationing Devices• What are other rationing devices?– First Come-First Served– Alphabetical– The government could decide who needs it themost– Height– Gender– etc.
  74. 74. Disequilibrium BehaviorDisequilibrium Behavior• Is it possible for the price and quantity toNOT be in equilibrium?• Yes - While the invisible hand may moveprice towards equilibrium, there are twotypes of forces that keep the price awayfrom equilibrium• We will call these “The Invisible Foot” and“The Invisible Handshake” (thanks for David Colanderfor these names!)
  75. 75. The Invisible FootThe Invisible Foot• This is government interference with pricesin the market.• The government does this quite often. Forinstance you mau notice that at UDF theyadvertise that they sell milk and beer at“state minimum prices” meaning that thestate will not allow prices on milk and beerto be below a set amount.
  76. 76. Price ControlsPrice ControlsThere are two types of price controls - PriceCeilings and Price Floors
  77. 77. Price CeilingsPrice Ceilings• Price Ceiling - sets a maximum price that isallowed by law.• Result of Price Ceiling:– Stay at a permanent shortage situation• Note that a price ceiling can be any pricethe government chooses. It is, however onlyeffective if it is below the equilibrium price
  78. 78. Price CeilingPrice Ceiling• Example of Price Ceiling• Rent controlled apartments• In New York City, San Francisco, Boston,and other cities the city or state determinesthe maximum amount that can be chargedfor rent on many apartments.• A maximum price is a price ceiling
  79. 79. Rent Controlled ApartmentsRent Controlled Apartments
  80. 80. Rent Controlled ApartmentsRent Controlled ApartmentsPQ0
  81. 81. Rent Controlled ApartmentsRent Controlled ApartmentsPQS0
  82. 82. Rent Controlled ApartmentsRent Controlled ApartmentsPQSD0
  83. 83. Rent Controlled ApartmentsRent Controlled ApartmentsPQSDP*Q*0
  84. 84. Rent Controlled ApartmentsRent Controlled ApartmentsPQSDP*Q*0PceilingQs QdAmount of Shortage
  85. 85. Winners and LosersWinners and LosersWho gains and loses with price ceilings:• 1. Benefit - those who get rent controlledapartments• 2. Loses - those who can’t find apartmentsdue to the shortage.• 3. Loses - landlords who must accept lowerrent.
  86. 86. Price FloorsPrice Floors• Price Floor - sets a minimum price that isallowed by law.• Result of Price Floor• Stay at a permanent surplus situation• Note that a price floor can be set at anyprice, but is only effective if it is above theequilibrium price
  87. 87. Price FloorsPrice Floors• Example of Price Floor• Minimum Wage Legislation• The minimum wage is a lowest price thegovernment will allow firms to pay forlabor.• A minimum price is a price floor
  88. 88. Price FloorsPrice Floors• When we look at the labor market it issimilar to other supply and demanddiagrams except for the labels.• L - quantity of workers• w - wages (the price we pay workers)• It is also different because the suppliers oflabor are households, not firms and thedemanders of labor are firms, nothouseholds
  89. 89. Winners and LosersWinners and LosersWho gains and loses with price floors:• 1. Benefit - those who get higher wages• 2. Loses - those who can’t find jobs at thehigher wage• 3. Loses - firms who must pay higherwages.
  90. 90. Minimum Wage LegislationMinimum Wage Legislation
  91. 91. Minimum Wage LegislationMinimum Wage LegislationWage# of Workers0
  92. 92. Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersS0
  93. 93. Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersSD0
  94. 94. Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersSDw*L*0
  95. 95. Minimum Wage LegislationMinimum Wage LegislationWage# of WorkersSDw*L*0wfloorLd LsAmount of UnemployedWorkers
  96. 96. Invisible HandshakeInvisible Handshake• The Invisible Handshake is social pressurethat often prevents price from reachingequilibrium• For instance, let’s think about whathappened recently when Bruce Springsteenplayed Music Hall downtown.• Tickets sold out in hours and there manypeople who wanted to get tickets than wereable to buy them from Ticketmaster
  97. 97. Invisible HandshakeInvisible Handshake• What does that say about the price of thetickets?• Were the tickets priced below or aboveequilibrium price?– Below, since there was a shortage• So why weren’t prices at the equilibriumprice?– Bruce didn’t want alienate fans– It is not considered “right” to charge so much
  98. 98. Invisible HandshakeInvisible Handshake• Another example of the InvisibleHandshake is with transplant organs• There are not enough organs for all thepeople who need them• This means the price of an organ is belowthe equilibrium• Why don’t hospitals and doctors raise theprice to equilibrium?
  99. 99. Rationing DevicesRationing Devices• When a market it out of equilibrium, priceis not always working as a rationing device.Think about what might be the rationingdevice for our examples– Tickets to the concert– Rent controlled apartments– Transplant Organs

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