The Market EquilibriumThe Market Equilibrium(Again)

■ ■ Market demand and supplyMarket demand and supply

■ ■ Bring together suppliers and Bring together suppliers and demandersdemanders

■ ■ EquilibriumEquilibrium

Market Demand Is the Sum Market Demand Is the Sum of All Individual Demandsof All Individual Demands

At each price, sum the individual quantities At each price, sum the individual quantities demanded, Da, Db … Dn, to get market quantity demanded, Da, Db … Dn, to get market quantity demanded (Dm)demanded (Dm)

+ =

Dm = ∑ Da + Db + . . . Dn

DbDa Dm

Market Supply Is the Sum of Market Supply Is the Sum of All Individual SuppliersAll Individual Suppliers

At each price, sum the individual quantities supplied At each price, sum the individual quantities supplied to get market quantity supplied (Sm)to get market quantity supplied (Sm)

Sa SbSm = ∑ Sa + Sb … Sn

+ =Sm

CompetitionCompetition

Demanders compete with each other to get Demanders compete with each other to get goods.goods.

Their efforts push price up, enriching suppliers.Their efforts push price up, enriching suppliers.

Suppliers compete with each other to attract Suppliers compete with each other to attract customers.customers.

Their efforts push price down, enriching Their efforts push price down, enriching demanders.demanders.

Demanders do NOT compete with suppliers, even Demanders do NOT compete with suppliers, even thought it sometimes seems that way. They are thought it sometimes seems that way. They are bargaining and cooperating.bargaining and cooperating.

Each party tries to convince the other of the Each party tries to convince the other of the benefit of more for itself.benefit of more for itself.

Equilibrium: Competition Equilibrium: Competition means mutually beneficial means mutually beneficial

cooperationcooperation At At ““equilibriumequilibrium”” no one has an incentive to change behavior: no one has an incentive to change behavior:

P*

Q*

Price

S

D

Q/time

Adjustments to Adjustments to equilibriumequilibrium

■ ■ Price above P*Price above P* ► ► Quantity supplied exceeds quantity demanded: Quantity supplied exceeds quantity demanded: excess supply, or excess supply, or ““surplussurplus”” ► ► Frustrated suppliers compete for business, lowering Frustrated suppliers compete for business, lowering prices (prices (““buyersbuyers’’ market market””)) ► ► Price falls until market clearsPrice falls until market clears

■■ Price below P*Price below P* ► ► Quantity demanded exceeds quantity supplied: Quantity demanded exceeds quantity supplied: excess demand, or excess demand, or ““shortageshortage”” ► ► Frustrated demanders compete for product, raising Frustrated demanders compete for product, raising prices (prices (““sellerssellers’’ market market””)) ► ► Price rises until market clearsPrice rises until market clears

Adjustment processAdjustment processWhat if the price is NOT right?What if the price is NOT right?

■■Competition forces push price toward equilibrium:Competition forces push price toward equilibrium:

Excess Supply

Excess Demand

P high

P low

Price

S

D

Q/time

Minimum Wage: A Price Minimum Wage: A Price FloorFloor

Legal minimum on wage: WmLegal minimum on wage: Wm– If greater than W*If greater than W*

excess supply of laborexcess supply of labor

Winners:Winners:– Those who keep their jobsThose who keep their jobs

LosersLosers– Firms (& their customers) who payFirms (& their customers) who pay– Those who lose their jobsThose who lose their jobs

S

D

$

Labor0 Ld LsL*

W*

Wm

Data Confirming Theory

Makes 360 burgers an hour—Makes 360 burgers an hour—customized—no dirty human customized—no dirty human handshands

Rent Controls: Rent Controls: A Price Ceiling on Apartment A Price Ceiling on Apartment RentRent Legal maximum on allowable rent:Legal maximum on allowable rent:

Pm less than P*Pm less than P* excess demand for spaceexcess demand for space

Winners:Winners:– Those who keep apartmentsThose who keep apartments

LosersLosers– LandlordsLandlords– Those who canThose who can’’t get int get in

$S

D

Quantity0 Qs Q* Qd

P*

Pm

San Francisco: Hurt by Rent Control (newspaper article)"In San Francisco, one of the toughest places in the country to find a place to live, more than 31,000 housing units — one of every 12 — now sit vacant, according to recently released census data. That’s the highest vacancy rate in the region, and a 70 percent increase from a decade ago."

The reason? The city's rent control laws make it difficult to raise rents or evict a tenant.  

"Increasingly, small-time landlords are just giving up, like one who has left two large apartments on the second and third floors of her building vacant for more than a decade, after a series of tenant difficulties. It’s just not worth the bother, or the risk, of being legally tied to a tenant for decades.” 

QuestionsQuestions

How do each of these events How do each of these events influence the equilibrium influence the equilibrium

(i) price of airline tickets and (i) price of airline tickets and (ii) quantity of airline trips taken(ii) quantity of airline trips taken

1. Rise in price of jet fuel1. Rise in price of jet fuel2. Depression in the economy2. Depression in the economy3. Threat of war3. Threat of war4. Government regulations making air 4. Government regulations making air

travel safertravel safer