Introduction to Economics Equilibrium Price and Quantity Basic

Introduction to Economics Equilibrium Price and Quantity

Basic Definitions • Equilibrium Price: The market price where the quantity of goods supplied is equal to the quantity of goods demanded – The price point at which the demand supply curves in the market intersect • Equilibrium Quantity: Simultaneously equal to both the quantity demanded and quantity supplied – In a market graph, the equilibrium quantity is the intersection of the demand curve and the supply curve

Equilibrium Price (in dollars) Quantity Supplied Quantity Demanded $100 70 10 $90 60 20 $80 55 25 $70 50 30 $60 45 40 $50 40 45 $40 30 50 $30 25 55 $20 20 60 $10 10 70

Equilibrium $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 S 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 Equilibrium Price: $55 $50 $40 $30 $20 $10 $0 S 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 Equilibrium Quantity: 43 $50 $40 $30 $20 $10 $0 S 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 S 0 D 2 20 40 60 D 1 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 New Equilibrium Price: $47 $40 $30 $20 $10 $0 S 0 D 2 20 40 60 D 1 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 New Equilibrium Quantity: 37 $30 $20 $10 $0 S 0 D 2 20 40 60 D 1 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 S 0 D 1 20 40 60 D 2 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 New Equilibrium Price: $63 $60 $50 $40 $30 $20 $10 $0 S 0 D 1 20 40 60 D 2 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 New Equilibrium Quantity: 47 $60 $50 $40 $30 $20 $10 $0 S 0 D 1 20 40 60 D 2 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 S 2 S 1 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 New Equilibrium Price: $63 $40 $30 $20 $10 $0 S 2 S 1 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 New Equilibrium Quantity: 37 $30 $20 $10 $0 S 2 S 1 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 S 1 0 S 2 20 D 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 New Equilibrium Price: $48 $40 $30 $20 $10 $0 S 1 0 S 2 20 D 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 New Equilibrium Quantity: 47 $40 $30 $20 $10 $0 S 1 0 S 2 20 D 40 60 80 QUANTITY 100

Equilibrium

Equilibrium $100 SURPLUS QUANTITY $90 $80 PRICE TOO HIGH $70 $60 $50 $40 $30 $20 $10 $0 S 0 D 20 40 60 80 QUANTITY 100

Equilibrium $100 $90 $80 $70 $60 $50 $40 $30 PRICE TOO LOW $20 $10 $0 QUANTITY SHORTAGE S 0 20 40 D 60 80 QUANTITY 100

Basic Definitions • Consumer Surplus: Consumers pay a lower price than the maximum price they would be willing to pay • Producer Surplus: Producers sell at a higher price than the minimum price at which they would be willing to sell • Economic Surplus: The sum of consumer surplus and producer surplus

Equilibrium $100 $90 $80 $70 Consumer Surplus $60 Equilibrium Price: $55 $50 Producer Surplus $40 $30 $20 $10 $0 S 0 D 20 40 60 80 QUANTITY 100

Basic Definitions • The change in consumer surplus is used to measure the changes in prices and income • Change in consumer surplus is –(P 1 – P 0) where P 0 is the original price and P 1 is the new or actual price (in other words – DOWN IS GOOD) – If the change in consumer surplus is positive, the price change is said to have increased the individual’s welfare – If the price change in consumer surplus is negative, the price change is said to have decreased the individual's welfare.

Basic Definitions • The change in producer surplus is used to measure the health and well being of the producer • Change in producer surplus is (P 1 – P 0) where P 0 is the original price and P 1 is the new or actual price (in other words – UP IS GOOD) – If the change in producer surplus is positive, the price change is said to have increased the producer’s welfare – If the price change in producer surplus is negative, the price change is said to have decreased the producer's welfare.

Equilibrium • Rationing: who gets how much of the available resources and goods • Rationing Tool: Means of choosing – May be rationed by political favor, physical appearance, favoritism, brute force, 1 st come, etc. – Price “gouging” or price as a rationing tool?

Equilibrium D 1 $100 D 2 S 1 S 2 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 0 20 40 60 80 QUANTITY 100

Equilibrium D 1 $100 D 2 S 1 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 0 20 40 60 80 QUANTITY 100

Ceilings and Floors • Price Control: When government laws regulate prices instead of letting market forces determine prices – In some cases, discontent over prices turns into public pressure on politicians, who may then pass legislation to prevent a certain price from climbing “too high” or falling “too low”

Ceilings and Floors

Ceilings and Floors • Price Ceiling: Highest legal price at which a good or service may be sold – Price ceilings only become a problem when they are set below the market equilibrium price – One of the most common examples of Price Ceilings is Rent Control

Ceilings and Floors $1, 000 $900 $800 D 1 D 2 S 1 $700 $600 EQUILIBRIUM PRICE $500 $400 $300 PRICE CEILING QUANTITY SHORTAGE $200 $100 10000 12000 14000 16000 18000 20000 22000 24000 26000 28000 QUANTITY

Ceilings and Floors In the case of rent controls on apartments, landlords are often encouraged by the effect of the laws to convert rental apartments into condominiums for sale, further reducing the supply of rental properties.

Ceilings and Floors • Price Floor: Lowest legal price at which a good or service may be sold – Price floors are used by the government to prevent revenue damage in particular industries – For a price floor to be effective, it must be set above the equilibrium price – The most common example of a Price Floor is the Minimum Wage

Ceilings and Floors $20 D 1 $18 S 1 JOB SHORTAGE $16 WAGE FLOOR $14 $12 EQUILIBRIUM WAGE $10 $8 $6 70 80 90 100 110 120 QUANTITY 130 140

Ceilings and Floors In the case of minimum wage increases, employers are often encouraged by their company’s labor requirements to roll the higher cost of labor into the retail price of the finished goods, creating inflation and limiting any additional buying power the higher wage may have generated.

Minimum Wage