Presentation on theme: "Equilibrium and Disequilibrium"— Presentation transcript:
1 Equilibrium and Disequilibrium Mr. MessereGr. 12 EconomicsCIA 4U11
2 Outline I. Changes in Equilibrium II. Market Disequilibrium A. Change in DemandB. Change in SupplyC. Change in Both Demand and SupplyII. Market DisequilibriumA. Price FloorsPrice CeilingsCommodity Agreements2
3 Market DynamicsEquilibrium - where quantity demanded equals quantity suppliedEquilibrium Price (P*) - price where equilibrium occurs.If price above equilibrium, then surplus occursIf price below equilibrium, then shortage arises26
5 Equilibrium in the Market What Occurs at Equilibrium?Demand Side - those who get the good are those willing and able (effective demand) to pay the P*.Supply Side - only those firms which are able to produce at or below the cost of P* will remain in business.28
6 Changes in Equilibrium Remember that Supply and Demand are drawn under the ceteris paribus assumption.Any factors which cause Supply and/or Demand to change will affect equilibrium price and quantity.29
7 Change in DemandDemand will change for any of the non-price determinants examined previously:Tastes/PreferencesIncomePrice of Substitute & Complementary goodsExpectationsPopulationCeteris paribus, let’s say the demand for CDs increased due to an increase in income. How would this affect market equilibrium price & quantity of CDs?30
10 Change in SupplySupply will change for any of the the non-price determinants examined previously:- Costs of Production – Input costs / taxes & subsidies- Technology- Nature and the environmentNumber of producersComplements & substitutes in productionCeteris paribus, let’s say that the government lowers taxes on CDs. How would this affect the market equilibrium price & quantity of CDs?38
13 Changes in Demand and Supply To determine the impact of both supply and demand changing:First examine what happens to equilibrium price and quantity when just demand shifts.Second, examine what happens to equilibrium price and quantity when just supply changesFinally, add the two effects together.46
14 Changes in Demand and Supply General Results:When supply and demand move in the same directionEquilibrium price is indeterminateWhen supply and demand move in opposite directionsEquilibrium quantity is indeterminate47
15 Supply & Demand Move in the Same Direction Assume 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?48
16 Supply & Demand Move in the Same Direction SSteakS’E1P1P?EP*E2D’DSteakQQ*Q1Q252
17 Final Equilibrium Quantity & Price when Demand & Supply move in the Same Direction Since 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 Q1 respectively.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 pushes the final market equilibrium quantity to E2 where the final equilibrium quantity is Q2 and equilibrium price is indeterminate.
18 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. How would this affect the market equilibrium price & quantity of spinach?
19 Supply & Demand Move in the Opposite Directions SSpinachE2P2P1E1P*ED’Q?DSpinachQQ*Q161
20 Final Equilibrium Quantity & Price when Demand & Supply move in Opposite Directions As 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.
21 The Role of Prices Convey information Rationiong device When the price of a Maple Leaf ticket increased from $120 last season to $150 this season (on average), it told us something about the popularity of the Maple LeafsRationiong deviceThe price is what determines who can have the good
22 Market Disequilibrium Is it possible for the price and quantity to NOT be in equilibrium?Yes - While the invisible hand may move price towards equilibrium, price controls tend to generate disequilibrium in the marketplace
23 Price Controls There are two types of price controls: 1) Price Ceilings2) Price Floors
24 Price CeilingsPrice Ceiling - sets a maximum price that is allowed by law.Result of Price Ceiling:Stay at a permanent shortage situationNote that a price ceiling can be any price the government chooses. It is, however only effective if it is below the equilibrium price77
25 Price Ceiling Example of Price Ceiling Rent controlled apartmentsIn 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 a price ceiling78
28 Rent Controlled Apartments PceilingDQQsQ*Amount of ShortageQd84
29 Winners and Losers Who gains and loses with price ceilings? 1. Benefit - those who get rent controlled apartments2. Loses - those who can’t find apartments due to the shortage.3. Loses - landlords who must accept lower rent.
30 Price FloorsPrice Floor - sets a minimum price that is allowed by law.Result of Price FloorStay at a permanent surplus situationNote that a price floor can be set at any price, but is only effective if it is above the equilibrium price86
31 Price Floors Example of Price Floor Minimum Wage LegislationThe minimum wage is a lowest price the government will allow firms to pay for labor.A minimum price is a price floor87
32 Price FloorsWhen we look at the labor market it is similar to other supply and demand diagrams except for the labels.L - quantity of workersw - wages (the price we pay workers)It is also different because the suppliers of labor are households, not firms, and the demanders of labor are firms, not households
35 Minimum Wage Legislation Amount of UnemployedWorkersWageSwfloorw*D# of WorkersLdL*Ls95
36 Winners and Losers Who gains and loses with price floors? 1. Benefit - those who get higher wages2. Loses - those who can’t find jobs at the higher wage3. Loses - firms who must pay higher wages.89
37 Commodity Agreements Market instability may arise due to: Fluctuating prices due to changing market conditionsChanging prices due to changes in exchange ratesChanges in foreign government protectionist measuresProducers of commodities (eg. coffee, sugar, grains, tin) may cooperate to stabilize the marketeg. prices kept from falling below certain level
38 Production Quota System An agreement by producers to limit the amount supplied to the market place & thus influence priceIndividual cartel members produce portion of output according to their quota
40 Buffer Stock SystemGroup of producers (with support of gov’t) set a target price or price band (price floor & ceiling)If market conditions lead toShortage (price above target price), buffer stock authority will sell off previously acquired stocksSurplus (price falls below target price), buffer stock authority will agree to purchase surplus at intervention price
42 Buffer Stock System - Considerations Surplus can be disposed of in several ways:Stored for future useOpportunity cost of storage facilities can be prohibitive for producersDestruction of commodityIf food, normative issue arises in light of global poverty & hungerSelling to other countriesIf dumped in another country (priced below foreigners’ own prices in domestic market) can undermine domestic producers in countries where goods soldProvision as overseas assistanceFood aid could lead to dependency culture
43 Use the last question page to complete the following. Further PracticeUse the last question page to complete the following.For each question indicate whether:- price increased, decreased or it was indeterminate (impossible to determine)- quantity increased, decreased or it was indeterminate (impossible to determine)Practice Test