equilibrium what is the equilibrium and why is it important to both producers and consumers?
TRANSCRIPT
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Equilibrium
What is the Equilibrium and why is it important to both producers and consumers?
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Combining Supply and Demand
• How do supply and demand create balance in the marketplace?
• What are differences between a market in equilibrium and a market in disequilibrium?
• What are the effects of price ceilings and price floors?
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surplus
shortage
price floor
price ceiling
Equilibrium
Supply Curve
DemandCurve
Quantity
Pri
ce
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Pri
ce
pe
r s
lic
e
Equilibrium Point
Finding Equilibrium
Price of a slice
of pizza
Quantity demanded
Quantity supplied
Result
Combined Supply and Demand Schedule
$ .50 300 100
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$.50
Slices of pizza per day
050 100 150 200 250 300 350
Supply Demand
The point at which quantity demanded and quantity supplied come together is known as equilibrium.
$2.00
$2.50
$3.00
150
100
50
250
300
350
Surplus from excess supply
$1.50 200 200 Equilibrium
Equilibrium Price
a
Eq
uili
briu
m
Qu
an
tity
$1.00 250 150
Shortage from excess demand
Balancing the Market
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Price ceilings and floors
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In some cases the government steps in to control prices. These interventions appear as
price ceilings and price floors.
Price Ceilings
• A price ceiling is a maximum price that can be legally charged for a good. This keeps prices from going to high.
• An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.
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surplus
shortage
price floor
price ceiling
Equilibrium
Supply Curve
DemandCurve
Quantity
Pri
ce
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Price Floors
• A price floor is a minimum price, set by the government, that must be paid for a good or service. To stop price from going to low.
• One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.
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surplus
shortage
price floor
price ceiling
Equilibrium
Supply Curve
DemandCurve
Quantity
Pri
ce
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Shortages and Surplus
Shortages quantity demand > quantity supply
excess demand
Surplus quantity supply > quantity demand
excess supply
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Price Floors lead to excess supply
price floor is above equilibrium price meant to push prices up
producers receive a benefit for providing that good or service
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Price Ceiling lead to excess demand
price ceiling is below equilibrium price Enable consumers to buy essential
goods or services the could not afford at the equilibrium price.
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surplus
shortage
price floor
price ceiling
Equilibrium
Supply Curve
DemandCurve
Quantity
Pri
ce
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Section 1 Assessment
• 1. Equilibrium in a market means which of the following?– (a) the point at which quantity supplied and quantity demanded are the
same
– (b) the point at which unsold goods begin to pile up
– (c) the point at which suppliers begin to reduce prices
– (d) the point at which prices fall below the cost of production
• 2. The government’s price floor on low wages is called the– (a) market equilibrium
– (b) base wage rate
– (c) minimum wage
– (d) employment guarantee
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Section 1 Assessment
• 1. Equilibrium in a market means which of the following?– (a) the point at which quantity supplied and quantity demanded are the
same
– (b) the point at which unsold goods begin to pile up
– (c) the point at which suppliers begin to reduce prices
– (d) the point at which prices fall below the cost of production
• 2. The government’s price floor on low wages is called the– (a) market equilibrium
– (b) base wage rate
– (c) minimum wage
– (d) employment guarantee
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Changes in Market Equilibrium
• How do shifts in supply affect market equilibrium?
• How do shifts in demand affect market equilibrium?
• How can we use supply and demand curves to analyze changes in market equilibrium?
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Shifts in Supply
• Understanding a Shift– Since markets tend toward equilibrium, a change in supply
will set market forces in motion that lead the market to a new equilibrium price and quantity sold.
• Excess Supply– A surplus is a situation in which quantity supplied is greater
than quantity demanded. If a surplus occurs, producers reduce prices to sell their products. This creates a new market equilibrium.
• A Fall in Supply– The exact opposite will occur when supply is decreased. As
supply decreases, producers will raise prices and demand will decrease.
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Shifts in Demand
• Excess Demand– A shortage is a situation in which quantity demanded is
greater than quantity supplied.
• Search Costs– Search costs are the financial and opportunity costs
consumers pay when searching for a good or service.
• A Fall in Demand– When demand falls, suppliers respond by cutting prices, and
a new market equilibrium is found.
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$800
$600
$400
$200
0
Pri
ce
Output (in millions)
Graph A: A Change in Supply
1 2 3 4 5
Analyzing Shifts in Supply and Demand
• Graph A shows how the market finds a new equilibrium when there is an increase in supply.
• Graph B shows how the market finds a new equilibrium when there is an increase in demand.
Original supply
Demand
a
New supply
b
c
Graph B: A Change in Demand
Output (in thousands)
$60
$50
$40
$30
$20
$10
0
900800700600500400300200100
Pri
ce
Supply
Original demand
a
New demand
c
b
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Section 2 Assessment
• 1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a– (a) lower market price and a higher quantity sold.
– (b) higher market price and a higher quantity sold.
– (c) lower market price and a lower quantity sold.
– (d) higher market price and a lower quantity sold.
• 2. What happens when any market is in disequilibrium and prices are flexible?– (a) market forces push toward equilibrium
– (b) sellers waste their resources
– (c) excess demand is created
– (d) unsold perishable goods are thrown out
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Section 2 Assessment
• 1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a– (a) lower market price and a higher quantity sold.
– (b) higher market price and a higher quantity sold.
– (c) lower market price and a lower quantity sold.
– (d) higher market price and a lower quantity sold.
• 2. What happens when any market is in disequilibrium and prices are flexible?– (a) market forces push toward equilibrium
– (b) sellers waste their resources
– (c) excess demand is created
– (d) unsold perishable goods are thrown out