Equilibrium and Disequilibrium Messere - Grade 11 Economics CIE 3M7

Equilibrium and Equilibrium and DisequilibriumDisequilibrium

Messere - Grade 11 Economics

CIE 3M7

OutlineOutline

I. IntroductionA. ShortagesB. SurplusesC. Equilibrium

II. Changes in EquilibriumA. Change in DemandB. Change in Supply

III. Disequilibrium - Price ControlsA. Price FloorsB. Price Ceilings

ShortageShortage

• Let’s say that Loony’s uptown decides to sell their CDs for $3 each.

• More than likely there will be a lot more people wanting to buy CDs than Loony’s has to sell.

• Why? Because at such a low price, the quantity demanded is quite high. But Loony’s does not want to sell that many at such a low price.

ShortageShortage

• This situation is called a shortage

• Shortage - when Qd > Qs at current market price.– Amount of Shortage = Qd - Qs

• Note - it is not correct to say Demand exceeds Supply, but rather quantity demanded exceeds quantity supplied.

ShortageShortage

Result of Shortage:

• If you are the manager of Loony’s and you find 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

ShortageShortage

P

Q

SCDs

DCDs

0

ShortageShortage

P

Q

SCDs

DCDs

0

Psh

Qs QdAmount of Shortage

Results of ShortageResults of Shortage

P

Q

S

D

0

Psh

Qs Qd

Results of ShortageResults of Shortage

P

Q

S

D

EP*

Q*0

Psh

Qs Qd

SurplusSurplus

• Let’s say that as the manager, you raised the prices 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 in from your supplier, but they don’t seem to be going out the door in sales.

SurplusSurplus

• This situation is called a surplus

• Surplus - when Qs > Qd at current market price.• Amount of surplus = Qs - Qd

• Note - not correct to say Supply exceeds Demand, but rather that quantity supplied exceeds quantity demanded.

Results of SurplusResults of Surplus

Result of Surplus:

• As manager you have to decide what do with all these CDs that are piling up and not selling. What do you do?– Have a sale!


• Firms have more than they can sell. Therefore, firms lower price to sell the product.

• As price decreases, Qd increases and Qs decreases

• P will decrease

SurplusSurplus

P

Q

SCDs

DCDs

0

SurplusSurplus

P

Q

SCDs

DCDs

0

Psur

Qd Qs

Amount ofSurplus


P

Q

SCDs

DCDs

0

Psur

Qd Qs

Amount ofSurplus


P

Q

SCDs

DCDs

E

P*

Q*0

Psur

Qd Qs

Amount ofSurplus

Equilibrium in the MarketEquilibrium in the Market

• Note that if the price is below P* then there will be a shortage causing price to rise

• If the price is above P* then there will be a surplus causing price to fall

• It’s as if P* is a magnet that keeps drawing price to it (and consequently quantity to Q*)

• This magnet is sometimes called “The Invisible Hand”


• Equilibrium - where quantity demanded equals quantity supplied.

• Equilibrium Price (P*) - price where equilibrium occurs.

EquilibriumEquilibrium

P

Q

S

D

EP*

Q*0


What Occurs at Equilibrium

• Demand Side - those who get the good are those willing and able to pay the P*.

• Supply Side - only those firms which are able to produce at or below the cost of P* will remain in business.

Changes in EquilibriumChanges in Equilibrium

• Remember that Supply and Demand are drawn under the ceteris paribus assumption.

• Any factors, other than price, which cause Supply and/or Demand to change will affect equilibrium price and quantity.

Change in DemandChange in Demand• Demand will change for any of the factors

examined previously:– Tastes/Preferences

– Income (Normal/Inferior goods/Y-dist.)

– Price of Substitute/Complimentary goods

– Number of Consumers

– Expectations of price changes

Ceteris paribus, suppose the demand for CDs increased due to an increase in income. How would this affect the market equilibrium price & quantity of CDs?

Increase in DemandIncrease in Demand

P

Q

SCDs

DCDs

0

Increase in DemandIncrease in Demand

P

Q

SCDs

DCDs

EP*

Q*0

D’

E’

Q*’

P*’

Change in SupplyChange in Supply

• Supply will change for any of the factors examined previously:- Technology

- Cost of Resources

- Taxes & Subsidies

- Number of Producers

- Changes in Nature

Ceteris paribus, let’s say that the government lowers taxes on CDs. How would this affect the market equilibrium price & quantity of CDs?

Increase in SupplyIncrease in Supply

P

Q

SCDs

DCDs

0

Increase in SupplyIncrease in Supply

P

Q

SCDs

DCDs

EP*

Q*0

S’

E’P*’

Q*’

The Role of PricesThe Role of Prices

• Convey information– When the price of a Maple Leaf tickets, on

average, increases by 10%, it indicates the popularity of the Maple Leafs

• Rationiong device– The price is what determines who can have the

good– Price acts as a means of allocating the

good/resource to reflect its scarcity value

Market DisequilibriumMarket Disequilibrium

• Is it possible for the price and quantity to NOT be in equilibrium?

• Yes - While the invisible hand may move price towards equilibrium, price controls tend to generate disequilibrium in the marketplace

Price ControlsPrice Controls

There are two types of price controls:

1) Price Ceilings

2) Price Floors

Price CeilingsPrice Ceilings

• Price Ceiling - sets a maximum price that is allowed by law.

• Result of Price Ceiling:– Stay at a permanent shortage situation

• Note that a price ceiling can be any price the government chooses. It is, however only effective if it is below the equilibrium price

Price CeilingPrice Ceiling

• Example of Price Ceiling• Rent controlled apartments

• In New York City, San Francisco, Boston, and other cities the city or state determines the maximum amount that can be charged for rent on many apartments.

• A maximum price is a price ceiling

Rent Controlled ApartmentsRent Controlled Apartments

P

Q

S

D

0


P

Q

S

D

P*

Q*0


P

Q

S

D

P*

Q*0

Pceiling

Qs QdAmount of Shortage

Winners and LosersWinners and Losers

Who gains and loses with price ceilings?

1. Benefit - those who get rent controlled apartments

2. Loses - those who can’t find apartments due to the shortage.

3. Loses - landlords who must accept lower rent.

Price FloorsPrice Floors

• Price Floor - sets a minimum price that is allowed by law.

• Result of Price Floor• Stay at a permanent surplus situation

• Note that a price floor can be set at any price, but is only effective if it is above the equilibrium price


• Example of Price Floor• Minimum Wage Legislation

• The minimum wage is a lowest price the government will allow firms to pay for labor.

• A minimum price is a price floor


• When we look at the labor market it is similar to other supply and demand diagrams except for the labels.• L - quantity of workers• w - wages (the price we pay workers)

• It is also different because the suppliers of labor are households, not firms, and the demanders of labor are firms, not households

Minimum Wage LegislationMinimum Wage Legislation

Wage

# of Workers

S

D

0


Wage

# of Workers

S

D

w*

L*0


Wage

# of Workers

S

D

w*

L*0

wfloor

Ld Ls

Amount of Unemployed Workers

Winners and LosersWinners and Losers

Who gains and loses with price floors?

1. Benefit - those who get higher wages

2. Loses - those who can’t find jobs at the higher wage

3. Loses - firms who must pay higher wages.

Practice Test Link

Further PracticeFurther Practice

• Take a sheet of paper out and number it from 1 to 5.

• For each question indicate whether:

- price increased, decreased or it was indeterminate (impossible to determine)

- quantity increased, decreased or it was indeterminate (impossible to determine)

Documents

Equilibrium and Disequilibrium Messere - Grade 11 Economics CIE 3M7