This document provides an overview of key concepts in microeconomics including markets, supply and demand, equilibrium, consumer and producer surplus, and the effects of changes in supply and demand. It defines markets, demand, the law of demand, supply, the law of supply, and equilibrium. It also discusses consumer surplus, producer surplus, surpluses and shortages, and the effects of price ceilings and floors.

1. MARKET EQUILIBRIUM
Microeconomics Lecture 4

2. Market
 Any place people come together to trade.
Trade or exchange
may take place at a
physical or virtual
location.

3. Demand - A Definition
 The willingness
and ability of
buyers to
purchase different
quantities of a
good at different
prices during a
specific time
period.

4. Law of Demand
 As the price of a good rises, the
quantity demanded of the good falls,
and as the price of a good falls, the
quantity demanded of the good rises,
ceteris paribus.
Price Quantity

5. Ceteris Paribus
 A Latin term meaning “all other things
constant” or “nothing else changes.”
 Ceteris paribus is an assumption used to
examine the effect of one influence on an
outcome while holding all other influences
constant.

6. Prices
 Absolute (Money) Price - The price of a good
in money terms.
 Relative Price (opportunity cost) - The price of
a good in terms of another good.

7. Supply
 The willingness and ability of sellers to
produce and offer to sell different quantities of
a good at different prices during a specific time
period.

8. Law of Supply
 As the price of a good rises, the quantity
supplied of the good rises, and as the price of a
good falls, the quantity supplied of the good
falls, ceteris paribus.
Price Quantity

9. Equilibrium
Market Clearance Price.
Equilibrium occurs at a price of $3 and a quantity of 30 units.
Market equilibrium Qd= Qs

10. Market Equilibrium

11. Surplus and Shortage
 Surplus (Excess Supply) - A condition in which
quantity supplied is greater than quantity
demanded.
 Surpluses occur only at prices above equilibrium
price.
 Shortage (Excess Demand) - A condition in
which quantity demanded is greater than
quantity supplied.
 Shortages occur only at prices below equilibrium
price.

12. Consumer and Producer Surplus

13. Consumer Surplus
 CS = Maximum buying price - Price paid
 CS = the difference between the maximum price
a buyer is willing and able to pay for a
good or service and the price actually
paid.

14. Producer Surplus
 PS = Price received - Minimum Selling Price
 PS = The difference between the price sellers receive
for a good and the minimum or lowest price for
which they would have sold the good.

15. Consumer and Producer Surplus

16. Total Surplus (TS)
TS = CS + PS
 Total Surplus (TS) is the sum of consumers’
surplus and producers’ surplus.

17. Total Surplus
Equilibrium

18. Activity
Plot the Supply and Demand curve & find market equilibrium
P&Q
Supply and demand for pizza
Price $ per
pizza
Qd Qs
10 0 40
8 10 30
6 20 20
4 30 10
2 40 0
0 125 0

19. Activity
Plot the Supply and Demand curve & find market equilibrium
P&Q
 What would happen if demand for pizzas tripled at each price?
What would occur if the price were initially set at $4 per pizza?
Supply and demand for pizza
Price $ per
pizza
Qd Qs
10 0 40
8 10 30
6 20 20
4 30 10
2 40 0
0 125 0
Plot the Supply and Demand curve & find market equilibrium
P&Q

20. Market Effects of Simultaneous Changes in
Supply and Demand
 Both the equilibrium price
and the equilibrium quantity
will increase.
 The equilibrium price will
decrease and the equilibrium
quantity will increase.

21. Using the Model to Predict
Changes in Price and Quantity
 An increase in university enrollment will
increase the demand for apartments,
shifting the demand curve to the right.
Both the equilibrium price and the
equilibrium quantity will increase.
 A report of pesticide residue on apples
decreases the demand for apples, shifting the
demand curve to the left. Both the equilibrium
price and the equilibrium quantity will
decrease.

22. Predicting the effects of changes in Supply
 Technological innovation decreases
production costs, shifting the supply
curve to the right. The equilibrium price
decreases, and the equilibrium quantity
increases.
 Bad weather decreases the supply of
coffee beans, shifting the supply curve to
the left. The equilibrium price increases,
and the equilibrium quantity decreases.

23. Explaining Changes in Price or Quantity
 At the same time the quantity increased,
the price decreased. Therefore, the
increase in consumption resulted from an
increase in supply, not an increase in
demand.
 At the same time the price decreased, the
quantity decreased. Therefore, the decrease in
price was caused by a decrease in demand, not
an increase in supply.

24. Price Ceilings & Floors
 A price ceiling is a legal maximum price that
can be charged for a good.
 Results in a shortage of a product (to control
inflation)
 Common examples include apartment rentals and
credit cards interest rates.
 Example: World war II butter price control
 A price floor is a legal minimum price that can
be charged for a good.
 Results in a surplus of a product
 Common examples include soybeans, milk,
minimum wage, support for agricultural prices.

25. Price Ceiling
A price ceiling is set at $2 resulting in a
shortage of 20 units.

26. Price Floor
A price floor is set at $4 resulting in a surplus of
20 units.

27. Exploring Supply and
Demand
 . If Jackie's income rises, what happens to her
demand for airplane trips? If the income of
most consumers of air travel rises (and air
travel is a normal good), what will happen to
the market equilibruim price P and quantity Q
of this good?

29. 2.
 If the taste for sneakers severely declines,
what happens to their price and the quantity
sold?
 P falls
 Q falls
D

31. 3.
 If the price of materials used to make sneakers
rises sharply, what happens to the price and
the quantity sold of sneakers?
 P rises
 Q falls

33. 4.
 If the technology for making some
communications device (say, cellular
telephones) leaps forward, what is most likely
to happen to the price and the quantity sold?
 P falls
 Q rises

35. 5.
 Consider the supply and demand for coffee in
London. Suppose the price of tea rises
sharply. If coffee is a substitute good for tea,
what happens to the price and quantity of
coffee?
 P rises
 Q rises

37. 6.
 A new rumor sweeps the country that eggs are
great diet food and they don't even raise
cholesterol levels. At the same time, advances
in chicken husbandry increase the number of
eggs that can be produced. What happens to
the price and quantity of eggs? (hint: both
supply and demand are affected)
 P Indeterminant
 Q rises

39. Increases in Demand and Supply
 Higher demand leads to higher
equilibrium price and higher
equilibrium quantity.
 Higher supply leads to lower
equilibrium price and higher
equilibrium quantity.

40. Decreases in Demand and
Supply
 Lower demand leads to lower
price and lower quantity
exchanged.
 Lower supply leads to higher
price and lower quantity
exchanged.

41. Relative Magnitudes of Change
• The relative magnitudes of change in supply and
demand determine the outcome of market equilibrium.

42. Relative Magnitudes of Change
• When supply and demand both increase, quantity
will increase, but price may go up or down.