# Market Equilibrium Mr. Barnett University High School AP Economics.

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Market Equilibrium Mr. Barnett University High School AP Economics

Market Equilibrium In a competitive market [many buyers and sellers] the price of a good serves as a rationing mechanism

Consumer Surplus Remember the concepts of marginal cost and marginal benefit Marginal cost – Marginal benefit – At the last unit purchased, the price the consumer pays (their marginal cost) equals the amount they are willing to pay (marginal benefit)

Producer Surplus The marginal cost of producing a good or service is represented by the supply curve The marginal benefit for a supplier is the price received from the sale of the product Thus, producer surplus is the difference between the price and the supply curve the additional return to producers above what they would require to produce that quantity of goods

Disequilibrium - Surplus Market Surplus If market price is above equilibrium Quantity supplied > Quantity demanded

Disequilibrium - Shortage Market Shortage If market price is below equilibrium Quantity demanded > Quantity supplied

Demand Decrease Less quantity demanded at every price Surplus at current price that causes pressure for price to decrease

Demand Increase More quantity demanded at every price Shortage at current price that causes pressure for price to increase

Supply Decrease Less quantity supplied at every price

Supply Increase More quantity supplied at every price

Double Shifts ??? Are cases where the results are indeterminate When double shifts occur, something [the effect on price or quantity] will be indeterminate

(b) Use a new graph to show what happens in the wheat market if the cost of fertilizer used in the production of wheat increases, and if the government announces that the consumption of wheat products greatly reduces the risk of having a heart attack. Explain the impact these events will have on each of the following. (i) Market price of wheat (ii) Industry output of wheat

S D P Q Q P S1 P1 Q1 Cost of fertilizer increases. This shifts supply to the left, causing the price to go up and the output to go down. Wheat greatly reduces the risk of heart attack. Demand for wheat increases causing the demand curve to shift to the right. D1 P1 Price goes up and quantity goes up. For the combination of supply decreasing and demand increasing, P definitely goes up, while Q is indeterminate. Q2

Other Examples How will a heat wave and a hurricane in the same summer affect ice cream market? How does Super Bowl advertising (very expensive) affect the beer market?

Steps Determine whether the event shifts the supply or demand curve (or both) Decide in which direction the curve(s) shift Use the supply and demand diagram to see how the shift(s) change the equilibrium price and quantity

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