2. Equilibrium
Equilibrium is a state of balance. Market
equilibrium is when the quantity
demanded is equal to quantity supplied.
There is no tendency for change at
equilibrium.
The markets naturally tend towards
equilibrium.
4. Equilibrium
The equilibrium point is where the two
graphs meet. At this point, Qd = Qs.
QE represents the quantity demanded and
supplied at equilibrium.
PE represents the price at equilibrium.
The market will operate at equilibrium.
However, if something shifts the demand
or supply curves, the equilibrium P and Q
will change.
5. Equilibrium
The market wants to operate at
equilibrium.
It’s similar to an atom that gives or
receives electrons to become balanced.
That’s what the market does, supply and
demand will adjust and try to find
equilibrium naturally.
The market will always move itself to
equilibrium, ceteris paribus.
6. Surplus and Shortage
Sometimes the price for an item isn’t at
equilibrium. Either sellers have mistakenly
put too high a price or too low a price
onto a product.
The price system will adjust itself to get
back to equilibrium on it its own.
The price, Qs and Qd all act as signals to
consumers and producers until the market
finds the correct price.
8. Surplus and Shortage
If price is above equilibrium price, Qs will
be higher than Qd.
That means there will be lots of stuff left
on the shelf because people don’t want to
buy the product for that high of a price.
This is called a surplus.
A surplus is a situation of excess supply in
a market (Qd < Qs).
9. Surplus and Shortage
As suppliers begin to incur losses because
they are producing more items than are
selling, they will start lowering prices
(sale!)
If the price is lower, more people will buy
the product, so there is an increase in Qd
If the price is lower, producers will
respond by supplying less (decrease Qs)
10. Surplus and Shortage
This will go on, little by little, until
equilibrium is reached and Qd = Qs
11. Surplus and Shortage
The opposite will occur when price is less
than equilibrium price:
12. Surplus and Shortage
If the price is set below equilibrium,
Qd>Qs (demand is higher than supply),
this is called a shortage.
A shortage is a situation of too little supply
in a market (Qd > Qs)
If the market was to stay here, buyers will
being to outbid each other to get the
product (think of Tickle-Me Elmo).
13. Surplus and Shortage
As the price goes up, producers will
increase production (increase Qs)
As the price goes up, buyers will decrease
their quantity demanded (decrease Qd)
15. Prices as Signals
This shows that prices—the monetary
value of a product as established by
supply and demand—is a signal that helps
us make our economic decisions.
16. Prices as Signals
Advantages:
Prices in a competitive market economy are
neutral because they favor neither the
producer nor the consumer.
Prices in a market economy are flexible. This
allows the price system to absorb unexpected
shocks and accommodate change.
Prices have no cost of administration.
Prices are familiar to us all, allowing decisions
to be made quickly and easily.
17. Price as Signal
How would we distribute and allocate
goods and services without prices?
Rationing—a system under which an
agency such as government decides
everyone’s “fair” share
Lottery?
Anarchy?
18. Rationing
Rationing is the most used allocation
system that does not use prices
Problems with rationing:
Fairness—who deserves how much?
High administrative cost
Diminishing incentive—people do not have as
much motivation to work or produce