Today

1
Today

• Market Equilibrium
• How shifts in demand and supply affect the market
  equilibrium
• Price floors price ceilings

2
The Market for Cheese

• Two main questions
• What will be the price of cheese?
• How much will be exchanged?

3
The Equilibrium Condition

• The 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.

4
Market Equilibrium, Graph
Price (/lb.)

• The equilibrium price, where QD QS, is 3. The
  equilibrium Q is 200 lbs.

S
4
P3
2
1
D
0
Quantity (lb.per week)
100
Q 200
0
400
300
5
Why Equilibrium?

• Excess demand or shortage when QD gt QS, at a
  particular price.
• Excess supply or surplus when QS gt 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.

6
Market Equilibrium, Graph
Price (/lb.)

• What if P4?
• What if P2?

S
4
P3
2
1
D
0
Quantity (lb.per week)
100
Q 200
0
400
300
7
Market for Sunflower Seeds
Price (/lb.)

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

S
4
3
2
1
D
0
100
200
0
300
400
Quantity(lb.per week)
8
Sunflower Seed Diet is Fad
Price (/lb.)

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

S
4
3
2
D
1
0
100
200
0
300
400
Quantity(lb.per week)
9
Description of Events

• The demand for sunflower seeds increased, which
  pushed up the price of sunflower seeds,
  increasing the quantity supplied.

10
A Closer Look at Adjustment
Price (/lb.)

• What drives P upward?
• QDgtQS
• Shortage at P0.
• Price will rise.

S
P0
D
QS
QD
Quantity(lb.per week)
11
A Closer Look at Adjustment
Price (/lb.)

• As the price rises, QD will fall QS will rise.
• Shortage gone at P1.

S
P1
P0
D
QS
Q
QD
Quantity(lb.per week)
12
Market for Corn
Price (/bu.)

• What if the price of soybean oil rises?
• Consider changes to both D S.

S
D
Quantity(bu. per year)
13
Market for Corn
Price (/bu)
S

• P of soybean oil rises.
• Why does S shift?
• Why does D shift?

S
P1
P0
D
Q1
Q0
Quantity(bushels per year)
14
Simultaneous Changes in D S

• The 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!

15
Price Controls

• When the govt 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.

16
Price Floor

• QSgt QD
• Surplus created by law.
• What Q is exchanged?

17
Effects of Price Floor

• With a price floor, there is a surplus. W/O the
  law, the price would fall, eliminating the
  surplus.

18
Minimum Wage Laws

• Sets a minimum price of labor.

19
Binding Minimum Wage Laws
Wage

• Firm are demanders of L.
• Workers are suppliers of L.
• Wage is price.
• What do we call a surplus of L?

S
WageFloor
QD
QS
Labor Hours
20
Is the current min. wage law binding?

• How can you tell?

21
Binding Minimum Wage Laws

• Goal 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.

22
Minimum Wage Effects, Contd.

• Winners
• Those who keep job (they earn more per hour).
• Losers
• Workers who lose their job (or get hours cut).
• Workers who cant find work.
• Employers (pay higher wage, cant afford as many
  workers).

23
Price Ceiling

• Price Ceiling a legal maximum price.

24
Price Ceiling
Price

• QDgt QS
• Shortage created by law.
• What Q is exchanged?

S
PCeiling
QS
QD
Quantity
25
Coming Up

• Begin Ch. 18, elasticity

26
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.

27
Market for Clothing

• There is a recession.

Price /item
S
P0
D
Q0
Items per week
28
Market for strawberries
Price (/lb.)

• What if the price of cabbage rises?
• Hint farmers can plant either one in the same
  fields.

S
P0
D
Q0
Quantity(lb. Strawb. per week)
29
Market for Yogurt
Price (/tub.)

• What if the price of live yogurt cultures falls?
• Hint Live cultures are needed to make yogurt.

S
P0
D
Q0
Quantity(tubs per week)