Three Possible Results Surplus – Because the price is too high, quantity supplied exceeds quantity demanded at a given price. Shortage – Because the price is too low quantity supplied is less than quantity demanded at a given price. Equilibrium – Quantity supplied equals quantity demanded at a given price. (See $5 in the previous example.) – This is the desired result. – Equilibrium price is also known as market price.
Adjustments While the equilibrium is where the price should be, it does not always work that way. When there is a surplus, suppliers need to attract more buyers. – They do this by lowering the price during the next trading period. – At the same time, they decrease the quantity supplied. – This results in a move toward equilibrium.
Adjustments, cont. When there is a shortage, suppliers try to meet the needs of more buyers. – They do this by increasing the quantity supplied during the next trading period. – At the same time, they increase the price. – This results in a move toward equilibrium.
Equilibrium Competition is necessary for equilibrium to be reached. – Without competition, a supplier may raise the price without worrying about a surplus, since buyers have nowhere else to go. – In a command economy, shortages may result because prices are set too low – there is no way for equilibrium to be reached.
Price-Related Policies Sometimes consumers or suppliers are not actually happy with the market price, so they ask the government to step in. There are two main types of price-related policies: – Price ceilings – Price floors Both of these involve trade-offs which are not always considered.
Price Ceilings Purpose: to keep prices low so that a product is affordable for a greater number of people. – This is essentially what many people would like to see happen with health care. A price ceiling is set below the market price (which is considered too high), or it will have no effect. Result (unintended): shortage – It is affordable for more people, but fewer people actually get it. Example: rent control – People who had cheap apartments were happy, but others had difficulty finding housing.
Price Ceilings D S Market price (considered to be too high) Price ceiling Shortage
Price floors Purpose: to keep prices high so that suppliers can make more money. A price floor is set above the market price (which is considered too low), or it will have no effect. Result (unintended): surplus – Suppliers would receive a higher price, but would actually sell less. Example: minimum wage – If minimum wage were increased, fewer people would have those jobs, but they would be making more money.
Price Floors D S Market price (considered to be too low) Price floor Surplus