The Economics The Economics Department, UMR Department, UMR Presents: Presents: Supply and Demand: Price Supply and Demand: Price and Quantity and Quantity Determination in Determination in Competitive Markets Competitive Markets
Starring Starring N Demand N Supply N Equilibrium and Disequilibrium
Featuring Featuring The Law of Demand N The Law of Demand N D = D(PENTE) N D = D(PENTE) N The Tendency of Supply N The Tendency of Supply N S = S(pent) N S = S(pent) N Equilibrium/Disequilibrium Disequilibrium N Equilibrium/ N
In Four Parts In Four Parts Demand Demand Supply Supply Equilibrium/Disequilibrium Equilibrium/Disequilibrium (current show) (current show) Changes in Equilibrium Changes in Equilibrium
Part 3 What Is Equilibrium? What Is Equilibrium? N It is a situation that exists in a market It is a situation that exists in a market N when the plans of buyers are consistent when the plans of buyers are consistent with the plans of sellers with the plans of sellers N Or, at the prevailing price, quantity Or, at the prevailing price, quantity N demanded equals the quantity supplied demanded equals the quantity supplied N Another, wider, view of equilibrium is Another, wider, view of equilibrium is N when the action taken leads to when the action taken leads to consequences that are expected, there is consequences that are expected, there is no incentive to change no incentive to change
Notes About the Concept of Notes About the Concept of Equilibrium Equilibrium N First, there should be no prior First, there should be no prior N judgement about whether a given judgement about whether a given equilibrium is good or bad equilibrium is good or bad N Second, markets not in equilibrium are Second, markets not in equilibrium are N in Disequilibrium Disequilibrium in O Shortages, or Shortages, or O O Surpluses Surpluses O
The Ethics of Equilibrium The Ethics of Equilibrium N William Lynch’s (1742 William Lynch’s (1742- -1820) early 1820) early N American tribunals dispatched swift American tribunals dispatched swift results with bodies soon coming to rest results with bodies soon coming to rest (an equilibrium) but most have rejected (an equilibrium) but most have rejected this as a good form of justice this as a good form of justice N Competitive equilibrium, under certain Competitive equilibrium, under certain N conditions, is efficient conditions, is efficient O Given scarcity, efficiency is a desirable Given scarcity, efficiency is a desirable O social objective social objective N It is the consequences of equilibrium we It is the consequences of equilibrium we N have to judge, not the state itself have to judge, not the state itself
Many Processes Are Not in Many Processes Are Not in Equilibrium Equilibrium N The one constant is change The one constant is change N N In economics change is purposeful and In economics change is purposeful and N may often be modeled successfully may often be modeled successfully N Equilibrium results from a given Equilibrium results from a given N change, an end state implied by these change, an end state implied by these models models N Many economic processes “tend Many economic processes “tend N toward” equilibrium toward” equilibrium
Disequilibrium Disequilibrium N Usually markets are “tending toward Usually markets are “tending toward N equilibrium” driven by the forces of supply and equilibrium” driven by the forces of supply and demand demand O Prices are used as a rationing mechanism Prices are used as a rationing mechanism O N Changing demand or supply conditions create Changing demand or supply conditions create N incentives for buyers and sellers to change their incentives for buyers and sellers to change their behavior behavior N Disequilibrium Disequilibrium is characterized by is characterized by N O Excess demand Excess demand-- --a shortage, or a shortage, or O O Excess supply Excess supply-- --a surplus a surplus O N Price controls (ceilings or floors) lead to Price controls (ceilings or floors) lead to N shortages or surpluses shortages or surpluses
Shortage Shortage N Shortage Shortage - - when Q when Q D > Q S at current D > Q S at current N market price market price O Amount of shortage = Q Amount of shortage = Q D - Q Q S D - O S N Note Note - - it is it is not not correct correct to say demand to say demand N exceeds supply, but rather quantity exceeds supply, but rather quantity demanded exceeds quantity supplied demanded exceeds quantity supplied
Surplus Surplus N Surplus Surplus - - when Q when Q S > Q D at current market S > Q D at current market N price price • Amount of surplus = Q Amount of surplus = Q S - Q Q D S - • D N Note Note - - it is it is not not correct correct to say supply to say supply N exceeds demand, but rather that quantity exceeds demand, but rather that quantity supplied exceeds quantity demanded supplied exceeds quantity demanded
Price Controls Price Controls There are two types of price controls - - There are two types of price controls price ceilings and and price floors price floors price ceilings
Price Ceilings Price Ceilings N Price ceiling Price ceiling - - sets a maximum price that sets a maximum price that N is allowed by law is allowed by law N Result of price ceiling Result of price ceiling N O Stay at a permanent shortage situation Stay at a permanent shortage situation O N Note that a price ceiling Note that a price ceiling can can be any price be any price N the government chooses. It is, however the government chooses. It is, however only effective if it is below below the the only effective if it is equilibrium price equilibrium price N Examples include maximum rents for Examples include maximum rents for N apartments and UMR parking permits apartments and UMR parking permits
Price Floors Price Floors N Price floor Price floor - - sets a minimum price that is sets a minimum price that is N allowed by law allowed by law N Result of price floor Result of price floor N O Stay at a permanent surplus situation Stay at a permanent surplus situation O N Note that a price floor Note that a price floor can can be any price be any price N the government chooses. It is, however the government chooses. It is, however only effective if it is above above the the only effective if it is equilibrium price equilibrium price N Examples include agriculture price Examples include agriculture price N supports and the minimum wage supports and the minimum wage
Equilibrium in the Market Equilibrium in the Market N Equilibrium Equilibrium - - where quantity where quantity N demanded equals quantity supplied demanded equals quantity supplied N Equilibrium price (P*) Equilibrium price (P*) - - price where price where N equilibrium occurs equilibrium occurs * there is no incentive for buyers or N At P At P * there is no incentive for buyers or N sellers to change their behavior. Their sellers to change their behavior. Their plans are consistent plans are consistent
Equilibrium, Graphically Equilibrium, Graphically P S E P* D Q/t 0 Q*
Equilibrium in the Market Equilibrium in the Market What occurs at equilibrium What occurs at equilibrium N Demand side Demand side - - those who get the good those who get the good N are those willing and able willing and able to pay the P* to pay the P* are those N Supply side Supply side - - only those sellers which only those sellers which N are able to produce at or below the cost are able to produce at or below the cost of P* will remain in business of P* will remain in business N Prices ration available supply to those Prices ration available supply to those N who value the good highest who value the good highest
Tendency Toward Tendency Toward Equilibrium in the Market Equilibrium in the Market N Note that if the price is Note that if the price is N P below P* then there will below P* then there will S be a shortage causing be a shortage causing P* price to rise price to rise D N If the price is above P* If the price is above P* N Q/t 0 Q* then there will be a then there will be a surplus causing price to surplus causing price to fall fall N Self interest generates Self interest generates N these price changes these price changes
An Example-- --UMR Student UMR Student An Example Parking Parking N It is easiest to see the tendency toward It is easiest to see the tendency toward N equilibrium by looking at a good that is not not equilibrium by looking at a good that is rationed by price-- --student parking student parking rationed by price N First, ask whether demand and supply curves are First, ask whether demand and supply curves are N typical typical N Demand Demand-- --is there an inverse relationship between is there an inverse relationship between N the number of parking spots wanted by UMR the number of parking spots wanted by UMR students and the price of the slots? Clearly YES students and the price of the slots? Clearly YES N Upward sloping supply? Again yes, the more the Upward sloping supply? Again yes, the more the N administration could extract from students, the administration could extract from students, the less important it would be for them to provide less important it would be for them to provide parking for staff and faculty parking for staff and faculty
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