TodayMarket EquilibriumHow shifts in demand and supply affect the market equilibriumPrice floors & price ceilings

The Market for CheeseTwo main questions:

What will be the price of cheese? How much will be exchanged?

The Equilibrium ConditionThe Equilibrium Condition: In order for the price and the quantity exchanged to remain unchanged, the QD must equal the QS.

Note: If D or S shift, then this will lead to a new equilibrium.

Market Equilibrium, GraphPrice($/lb.)

4

P*=3

2

1

00 100 Q*=

200300 400

SThe equilibrium price, where QD = QS, is $3. The equilibrium Q is 200 lbs.

D

Quantity(lb.per week)

Why Equilibrium?Excess demand or shortage: when QD > QS, at a particular price. Excess supply or surplus: when QS > QD, at a particular price.An observation: Excess demand causes P to rise. Excess supply causes P to fall.Equilibrium: No excess demand, no excess supply. Stable price.

Market Equilibrium, GraphPrice($/lb.)

4

P*=3

2

1

00 100 Q*=

200300 400

SWhat if P=$4?What if P=$2?

D

Quantity(lb.per week)

Market for Sunflower Seeds

200

Where is the initial equ.?What if a new s.s. diet becomes fashionable?

Price($/lb.)

4

3

2

1

00 100 300 400

S

D

Quantity(lb.per week)

Sunflower Seed Diet is Fad

200

Why does D shift?What happens to equ. P & Q?Does this make sense?

Price($/lb.)

4

3

2

1

00 100 300 400

S

D

Quantity(lb.per week)

D’

Description of Events“The demand for sunflower seeds increased, which pushed up the price of sunflower seeds, increasing the quantity supplied.”

A Closer Look at AdjustmentWhat drives P upward?QD>QS

Shortage at P0.

Price will rise.

Price($/lb.) S

D

D’

Quantity(lb.per week)QS

P0

QD

A Closer Look at AdjustmentAs the price rises, QD will fall & QS will rise.Shortage gone at P1.

Price($/lb.) S

D

D’

Quantity(lb.per week)QS

P0

QD

P1

Q

Market for CornWhat if the price of soybean oil rises? Consider changes to both D & S.

Price($/bu.) S

D

Quantity(bu. per year)

Market for CornP of soybean oil rises. Why does S shift?Why does D shift?

Price($/bu) S

D

S’

Quantity(bushels per year)Q0Q1

P1

P0

D’

Simultaneous Changes in D & SThe ultimate effect on equ. P & Q will depend on how much D shifts relative to the shift in S.In our example, price must rise, but quantity exchanged might rise or falls depending on which effect is stronger.Experiment on your own with various combinations of D & S changes!

Price ControlsWhen the gov’t sets a legal min. or max. price.Price Floor: a legal minimum price. (Not allowed to charge less than $___.)Note: If it is set below the equilibrium price, will not affect the market. Said to be “nonbinding”. We focus on binding price floors.

Price FloorQS> QD

Surplus created by law.What Q is exchanged?

PriceS

D

QuantityQS

PFloor

QD

Effects of Price FloorWith a price floor, there is a surplus. W/O the law, the price would fall, eliminating the surplus.

Minimum Wage LawsSets a minimum price of labor.

Binding Minimum Wage LawsFirm are demanders of L.Workers are suppliers of L.Wage is price.What do we call a surplus of L?

WageS

D

Labor HoursQS

WageFloor

QD

Is the current min. wage law binding?

How can you tell?

Binding Minimum Wage LawsGoal: Give lowest-skilled workers an above-market wage.Effects:

Those with jobs get higher income.Fewer jobs available, harder to find jobs.Employers may discriminate more easily.

Minimum Wage Effects, Cont’d.Winners

Those who keep job (they earn more per hour).

LosersWorkers who lose their job (or get hours cut).Workers who can’t find work.Employers (pay higher wage, can’t afford as many workers).

Price CeilingPrice Ceiling: a legal maximum price.

Price CeilingQD> QS

Shortage created by law.What Q is exchanged?

PriceS

D

QuantityQD

PCeiling

QS

Coming Up:Begin Ch. 18, elasticity

Group Work: Changes in Market Equilibrium

For each scenario, address the following:Does demand or supply shift?Which direction does it shift?Draw the new curve on the graph on properly label it.Indicate the new equilibrium price & quantity.Explain what happened in this market in complete sentences.

Market for ClothingThere is a recession.

Price/item S

D

Items per weekQ0

P0

Market for strawberriesWhat if the price of cabbage rises? Hint: farmers can plant either one in the same fields.

Price($/lb.) S

D

Quantity(lb. Strawb. per week)Q0

P0

Market for YogurtWhat if the price of live yogurt cultures falls? Hint: Live cultures are needed to make yogurt.

Price($/tub.) S

D

Quantity(tubs per week)Q0

P0