equilibrium - buffer stocks (oct 05)

8/3/2019 Equilibrium - Buffer Stocks (Oct 05)

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Equilibrium and

DisequilibriumMr. Messere

Gr. 12 EconomicsCIA 4U1


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Outline

I. Changes in Equilibrium

A. Change in Demand

B. Change in Supply

C. Change in Both Demand and Supply

II. Market Disequilibrium

A. Price Floors

B. Price Ceilings

C. Commodity Agreements


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Equilibrium/Surplus/Shortage

P

Q

S

D

E

P*

Q*0

Surplus

Shortage

P1

P2


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Equilibrium in the Market

What Occurs at Equilibrium?

Demand Side - those who get the good are

those willing and able (effective demand) topay the P*.

Supply Side - only those firms which are

able to produce at or below the cost of P*will remain in business.


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Changes in Equilibrium

Remember that Supply and Demand are

drawn under the ceterisparibus assumption.

Any factors which cause Supply and/or

Demand to change will affect equilibrium

price and quantity.


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Change in Demand

Demand will change for any of the non-price

determinants examined previously:

Tastes/Preferences

Income

Price of Substitute & Complementary goods

Expectations

Population

Ceteris paribus, lets say the demand for CDs increased due

to an increase in income. How would this affect market

equilibrium price & quantity of CDs?


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Increase in Demand

P

Q

SCDs

DCDs

0


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Increase in Demand

P

Q

SCDs

DCDs

EP*

Q*0

D

E

Q*

P*


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Change in Supply

Supply will change for any of the the non-price determinants examined previously:- Costs of ProductionInput costs / taxes & subsidies

- Technology

- Nature and the environment

- Number of producers

- Complements & substitutes in production

Ceteris paribus, lets say that the government lowers taxes

on CDs. How would this affect the market equilibrium price

& quantity of CDs?


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Increase in Supply

P

Q

SCDs

DCDs

0


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Increase in Supply

P

Q

SCDs

DCDs

EP*

Q*0

S

EP*

Q*


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Changes in Demand and Supply

To determine the impact of both supply and

demand changing:

First examine what happens to equilibriumprice and quantity when just demand shifts.

Second, examine what happens to

equilibrium price and quantity when justsupply changes

Finally, add the two effects together.


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Changes in Demand and Supply

General Results:

When supply and demand move in the same

direction

Equilibrium price is indeterminate

When supply and demand move in opposite

directions Equilibrium quantity is indeterminate


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Supply & Demand Move in the Same

DirectionAssume ceteris paribus:

Suppose that the barbecue season is at its

peak. Also, the price of cattle decreases by

10% during this time. How would this affect

the market equilibrium price & quantity of

steak?


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Supply & Demand Move in the Same

DirectionP

Q

SSteak

DSteak

EP*

Q*0

D

E1P1

Q1

S

Q2

E2P

?


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Final Equilibrium Quantity & Price when

Demand & Supply move in the Same DirectionSince it is barbecue season, consumer preference for

steak has increased, thus causing demand to increase

from D to D. This temporarily pulls up price and

increases quantity demanded to P1 and Q1respectively.

At the intermediate equilibrium level, E1, supply then

increases from S to S as a result of lower cattle

prices (a fall in the price of an input) which pushesthe final market equilibrium quantity to E2 where the

final equilibrium quantity is Q2 and equilibrium price

is indeterminate.


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Supply & Demand Move in Opposite

Directions

Assume ceteris paribus:

Suppose that the price of lemons falls and

lemon is considered an essential ingredient in

preparing great tasting spinach. At the same

time, many spinach farmers also reduce the

amount of land used to produce spinach. Howwould this affect the market equilibrium price

& quantity of spinach?


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Supply & Demand Move in the Opposite

Directions

P

Q

SSpinach

DSpinach

E

P*

Q*0

D

Q1

P1 E1

S

E2

Q?

P2


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Final Equilibrium Quantity & Price when Demand

& Supply move in Opposite DirectionsAs a result of the price of lemons falling (a complimentary

good) the demand for spinach increases from D to D and

temporarily raises the price from P* to P1 and quantity

from Q* to Q1.

At the intermediate equilibrium level, E1, supply then

decreases from S to S because there are fewer farmers

growing spinach which pushes the final market

equilibrium quantity to E2 where the final equilibrium

price is P2 and equilibrium quantity is indeterminate.


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The Role of Prices

Convey information

When the price of a Maple Leaf ticket increased

from $120 last season to $150 this season (onaverage), it told us something about the

popularity of the Maple Leafs

Rationiong deviceThe price is what determines who can have the

good


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Market Disequilibrium

Is it possible for the price and quantity to

NOT be in equilibrium?

Yes - While the invisible hand may moveprice towards equilibrium, price controls

tend to generate disequilibrium in the

marketplace


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Price Controls

There are two types of price controls:

1) Price Ceilings

2) Price Floors


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Price 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 onlyeffective if it is below the equilibrium price


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Price 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 aprice ceiling


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Rent Controlled Apartments

P

Q

S

D

0


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P

Q

S

D

P*

Q*0


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P

Q

S

D

P*

Q*0

Pceiling

Qs QdAmount of Shortage


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Winners and Losers

Who gains and loses with price ceilings?

1. Benefit - those who get rent controlled

apartments

2. Loses - those who cant find apartments

due to the shortage.

3. Loses - landlords who must acceptlower rent.


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Price 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 theequilibrium price


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Price Floors

Example of Price Floor

Minimum Wage Legislation

The minimum wage is a lowest price thegovernment will allow firms to pay for

labor.

A minimum price is aprice floor


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Price Floors

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 oflabor are households, not firms, and the

demanders of labor are firms, not

households


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Wage

# of Workers

S

D

0


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Wage

# of Workers

S

D

w*

L*0


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Wage

# of Workers

S

D

w*

L*0

wfloor

Ld Ls

Amount of Unemployed

Workers


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Winners and Losers

Who gains and loses with price floors?

1. Benefit - those who get higher wages

2. Loses - those who cant find jobs at the

higher wage

3. Loses - firms who must pay higher wages.


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Commodity Agreements

Market instability may arise due to:

Fluctuating prices due to changing market conditions

Changing prices due to changes in exchange rates

Changes in foreign government protectionist measures

Producers of commodities (eg. coffee, sugar,

grains, tin) may cooperate to stabilize the market

eg. prices kept from falling below certain level


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Production Quota System

An agreement by producers to limit the amount

supplied to the market place & thus influence

price Individual cartel members produce portion of

output according to their quota


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Production Quota System

Price S1

D

S2

P1

P2

Q1Q2


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Buffer Stock System

Group of producers (with support of govt)set a target price or price band (price floor

& ceiling) If market conditions lead to

Shortage (price above target price), buffer stockauthority will sell off previously acquired stocks

Surplus (price falls below target price), buffer stockauthority will agree to purchase surplus at interventionprice


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Buffer Stock System

Price S5

D

S1

P1

P4

Q5

Q2

Target Band

P3

P2

S4S2

Q1

Q4

Q3

S3

Shortage

Surplus


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Buffer Stock System - Considerations

Surplus can be disposed of in several ways: Stored for future use

Opportunity cost of storage facilities can be prohibitive forproducers

Destruction of commodity If food, normative issue arises in light of global poverty &

hunger

Selling to other countries If dumped in another country (priced below foreigners own

prices in domestic market) can undermine domestic producersin countries where goods sold

Provision as overseas assistance Food aid could lead to dependency culture


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Further Practice

Use the last question page to complete the following.

For each question indicate whether:

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

- quantity increased, decreased or it was

indeterminate (impossible to determine)

Practice Test
http://ecedweb.unomaha.edu/Dem_Sup/econqui2.htmhttp://ecedweb.unomaha.edu/Dem_Sup/econqui2.htm

equilibrium - buffer stocks (oct 05)

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