Market Equilibrium Concepts PDF

CHAPTER 2 PART 3 MARKET EQUILIBRIUM  Equilibrium is the state in which market supply and demand balance each other, and as a result, prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand. The balancing effect of supply a...

CHAPTER 2 PART 3 MARKET EQUILIBRIUM  Equilibrium is the state in which market supply and demand balance each other, and as a result, prices become stable. Generally, an over-supply of goods or services causes prices to go down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium. MARKET EQUILIBRIUM refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.  MARKET FOR BOTTLED WATER P S $10 Equilibrium D Q 10 (millions bottles per day) WHY IS THIS AN EQUILIBRIUM? If Qs > Qd surplus price falls until Qs = Qd If Qs < Qd shortage price rises until Qs = Qd CHANGES IN EQUILIBRIUM If supply and/or demand changes (shifts left or right), then equilibrium will change too. EXAMPLE 1 Market for bottled water price of plastic bottles rises what happens to equilibrium? WHICH CURVE IS AFFECTED? buyers or sellers? Supply curve bottles are an input INCREASE OR DECREASE IN SUPPLY? Increase in cost of input supply decreases shift LEFT  S’ P S Equilibrium: $10 P Q D Q 10 (millions bottles per day) EXAMPLE 2 Market for bottled water sugar is found to be harmful to health what happens to equilibrium? WHICH CURVE IS AFFECTED? Demand curve health concerns increase preferences for water INCREASE OR DECREASE IN DEMAND? Increase in preference for water demand increases shift RIGHT  P S Equilibrium: $10 P D’ Q D Q 10 (millions bottles per day) EXAMPLE 3 Market for bottled water incomes fall & sellers expect utilities to rise WHICH CURVE IS AFFECTED? Demand curve income falls Supply curve seller expectations change expect costs to rise INCREASE OR DECREASE? Demand decreases (left) income falls & bottled water is normal good Supply increases (right) make more water today before costs go up P S S’ Equilibrium: P Q ? D’ D Q (millions bottles per day) PRICE CEILING is legally imposed maximum price on the market. Transactions above this price is prohibited. Policy makers set ceiling price below the market equilibrium price which they believed is too high. Intention of price ceiling is keeping stuff affordable for poor people. Price ceiling generates shortages on the market.  Rent S rent ceiling = $1200 $2500 $1200 D 250 500 750 Q  Rent S at P = $1200: Qd = 750 units Qs = 250 units $2500 SHORTAGE $1200 D 250 500 750 Q WHO GETS HOUSING? those willing to pay more bogus fees:“key money” those who look harder loss of time those who get lucky Monica on Friends RESULT Price does not ration scarce good too few apt. units lost resources in searching price ceiling is inefficient PRICE FLOOR is legally imposed minimum price on the market. Transactions below this price is prohibited. Policy makers set floor price above the market equilibrium price which they believed is too low. Price floors are most often placed on markets for goods that are an important source of income for the sellers, such as labor market. Price floor generate surpluses on the market.