Market Equilibrium

Market Equilibrium Mr. Barnett

University High SchoolAP Economics

Market Equilibrium

In a competitive market [many buyers and sellers] the price of a good serves as a rationing mechanism

Consumer Surplus

Remember the concepts of marginal cost and marginal benefit◦Marginal cost – ◦Marginal benefit –

At the last unit purchased, the price the consumer pays (their marginal cost) equals the amount they are willing to pay (marginal benefit)

Producer Surplus

The marginal cost of producing a good or service is represented by the supply curve

The marginal benefit for a supplier is the price received from the sale of the product

Thus, producer surplus is the difference between the price and the supply curve◦the additional return to producers above what they

would require to produce that quantity of goods

Disequilibrium - Surplus

Market Surplus◦If market price is above equilibrium◦Quantity supplied > Quantity demanded

Disequilibrium - Shortage

Market Shortage◦If market price is below equilibrium◦Quantity demanded > Quantity supplied

Demand Decrease◦Less quantity demanded at every price◦Surplus at current price that causes pressure

for price to decrease

Demand Increase ◦More quantity demanded at every price◦Shortage at current price that causes pressure

for price to increase

Supply Decrease◦Less quantity supplied at every price

Supply Increase◦More quantity supplied at every price

Double Shifts ◦??? Are cases where the results are

indeterminate◦When double shifts occur, something [the effect

on price or quantity] will be indeterminate

(b) Use a new graph to show what happens in the wheat market if the cost of fertilizer used in the production of wheat increases, and if the government announces that the consumption of wheat products greatly reduces the risk of having a heart attack. Explain the impact these events will have on each of the following.

(i) Market price of wheat

(ii) Industry output of wheat

S

D

P

QQ

P

S1

P1

Q1

Cost of fertilizer increases.This shifts supply to the left, causing theprice to go up and the output to go down.

Wheat greatly reduces the risk of heart attack.Demand for wheat increases causing thedemand curve to shift to theright.

D1

P1Price goes up and quantitygoes up.

For the combination of supplydecreasing and demand increasing, P definitely goes up,while Q is indeterminate.

Q2

Other Examples◦How will a heat wave and a hurricane in the

same summer affect ice cream market?◦How does Super Bowl advertising (very

expensive) affect the beer market?

Steps◦Determine whether the event shifts the supply

or demand curve (or both)◦Decide in which direction the curve(s) shift◦Use the supply and demand diagram to see

how the shift(s) change the equilibrium price and quantity