Chapter 6: Equilibrium

(Combining Demand and Supply)

Review:

Demand vs. Supply

Demand vs. Supply

• Consumers are willing and able to purchase

• Price and Quantity have an INVERSE relationship

• Negative Slope

• Curves Down and to Right

• Businesses are willing and able to sell

• Price and Quantity have a DIRECT relationship

• Positive Slope

• Curves Up and to Right

Movements:Movements:Demand vs. Supply

• Cause:

Price (Ceteris Paribus)

• Called: Change in Quantity Demanded

• Cause:

Price (Ceteris Paribus)

• Called: Change in Quantity Supplied

Shifts:Shifts: Demand vs. Supply

• Cause:

Quantity (PYNTE)

• Called:

Change in Demand

• Cause:

Quantity (SPENT)

• Called:

Change in Supply

Is this Demand or Supply?

1. PYNTE variables• Demand

2.

3.

• SUPPLY

• Demand

4. Ceteris Paribus causes

a movement

• Demand and SUPPLY

5.

6. SPENT variables• SUPPLY

• SUPPLY

Demand• Starting at point X

1. Increase in Quantity Demanded

2. Decrease in Quantity Demanded

3. Increase in Demand

4. Decrease in Demand

Z

Y

S

Y

Supply• Starting at point X

1. Increase in Quantity Supplied

2. Decrease in Quantity Supplied

3. Increase in Supply

4. Decrease in Supply

Y

Z

S

Q

How much are you going to pay for that doggie in the window?

Answer: The market price.

Doggie Example

“The price will settle at the point where the number of dogs for sale exactly matches the number of dogs that consumers want to buy. If there are more potential pet owners than dogs available, then the price of dogs will go up. Some consumers will then decide to buy ferrets instead and some pet shops will offer more dogs for sale. Eventually, the supply of dogs will match the demand. Remarkably, some markets actually work this way.

--Naked Economics, p. 15

Equilibrium

The point at which Demand and Supply are EQUAL at the SAME Price and Quantity

Example: Point F

What is Equilibrium?

Price Quantity Demanded

Quantity Supplied

$1 5 1

$2 4 2

$3 3 3

$4 2 4

$5 1 5

Equilibrium

Price Quantity Demanded

Quantity Supplied

$1 5 1

$2 4 2

$3 3 3$4 2 4

$5 1 5

Equilibrium

Price Quantity Demanded

Quantity Supplied

$1 5 1

$2 4 2

$3 3 3$4 2 4

$5 1 5

What is the difference between…

Equilibrium PriceThe Price at which Quantity

Demanded and Quantity Supplied are EQUAL

Example: $3

Equilibrium QuantityThe Quantity at which Quantity

Demanded and Quantity Supplied are EQUAL

Example: 3

Equilibrium PriceExample: $2

Equilibrium QuantityExample: 20

Disequilibrium

Any Price or Quantity NOT at equilibrium

Demand and Supply are NOT equal in the Market

Example: Points Y and X

7. Identify

a) Equilibrium price has [increased / decreased]

 

b) Equilibrium quantity has [increased / decreased]

7. Identify

a) Equilibrium price has [increased / decreased]

 

b) Equilibrium quantity has [increased / decreased]

Outcomes of Disequilibrium…

Excess DemandExcess Supply

Excess Demand

Quantity Demanded is MORE than Quantity Supplied

AKA: Shortage

Excess Demand (Shortage)

1 2 3 4 5 6

Scenario:

Betty wants 10 Candy Bars. The problem is that there is only 6 on the shelves

1 2 3 4 5 6 7 8 9 10

The Green represents TOO much DEMAND

The Purple Represents NOT enough Supply

Excess Demand (Shortage)Real-Life Examples:

• Turkeys before Thanksgiving

• Elmo dolls before Christmas

• Eggs before Easter

• Flu shots during flu season

• California’s electricity shortage

Excess Demand(Shortage)

• What do you think will eventually happen to PRICE when there is a shortage?

Excess Demand(Shortage)

• What do you think will eventually happen to PRICE when there is a shortage?

• It will INCREASE

Excess Supply

Quantity Demanded is LESS than Quantity Supplied

AKA: Surplus

Excess Supply (Surplus)

The Green represents NOT enough Demand

The Purple Represents TOO much Supply

Scenario:

Betty went to the mall for 2 t-shirts. The store had 8 t-shirts.

1 2 3 4 5 6 7 8

1 2

Excess Supply (Surplus) Real-Life Examples:

• Christmas decorations after the Christmas

• Crops are in season—like apples in the fall or watermelon in the summer

• Companies thought a product would sell—but no one wants it

Excess Supply (Surplus)

• What do you think will eventually happen to PRICE when there is a surplus?

Excess Supply (Surplus)

• What do you think will eventually happen to PRICE when there is a surplus?

• It will DECREASE

Why would a deer cost

$43,000?

Why would a deer cost $43,000?

There are local farms that breed deer for the purpose of selling them— “deer farms”

These deer farms grow deer for the sole purpose of selling them—mostly to people in Western states.

Why would a deer cost $43,000?

The buyers purchase deer to:

• Increase the amount of deer in Western woods (where hunters pay a certain amount of money each year to hunt in a particular area)

• For genetics—to reproduce and create “more superior” deer

Why would a deer cost $43,000?

• When there is NOT a lot of genetically superior deer, the supply for deer decreases.

• Because many people want the deer, the number of demanders increases.

• As a result, the price of deer

increases—to $43,000!!!

Why would a deer cost$43,000?

Answer: Excess Demand (shortage)

Outcomes of Price Control…

Price CeilingPrice Floor

Price Ceiling

The MAXIMUM Price that can be legally charged for a good or service

Example: Rent Control

Advantages: Keeps prices lower & affordable

Disadvantages: Reduces Quantity and Quality

Price FloorThe MINIMUM Price that can be legally charged for a good or service

Example: Minimum wage

Advantage:Creates a standard

Disadvantage:More unemployed because costs increase

Black Market

Items sold illegally

Examples: Babies, guns, drugs

Efficient Resource Allocation

Distribute goods and services adequately

Role of Prices

Prices

Advantages

1. Measure of value

2. Signal of how and what to produce

3. Flexibility

4. Costs nothing to administer

5. Wide choice of goods

6. Efficiency

Disadvantages

1. People use the black market

2. Can cause shortages or surpluses

3. Can cause externalities (unintended economic side effects)

4. Consumers make ill-advised decisions

Which ones do they have in common?

P: Price of Related Goods

Y: Income

N: Number of Demanders

T: Taste

E: Expectations

S: Supplier Input Costs

P: Price of Related Good

E: Expectations

N: Number of Suppliers

T: Technology,

Taxes,

Tampering, Temperature

Causes in Change in Demand Causes in Change in Supply

Also…

The “N” variables are different—

Demand:Demand:

N: Number of Demanders

Supply:Supply:

N: Number of Suppliers

The “T” variables are different—

Demand:Demand: T: Taste

Supply:Supply: T: There are 4 of them… none of which are

TASTE!!!

Bails of HayThe price of hay is expected to increase.

(From $4 a bail now to $ 10 a bail in the future)

Is there a PYNTE variable?

Is there a SPENT variable?

Bails of HayThe price of hay is expected to increase.

(From $4 a bail now to $ 10 a bail in the future)

Is there a PYNTE variable? YES

Is there a SPENT variable? YES

What is the variable?

Bails of HayThe price of hay is expected to increase.

(From $4 a bail now to $ 10 a bail in the future)

What is the Variable?

Expectations

What happens to the demand

of bails of hay? What happens to the supply

of bails of hay?

Bails of HayThe price of hay is expected to increase.

(From $4 a bail now to $ 10 a bail in the future)

Expectations

The demand for bails of hay INCREASES

The supply for bails of hay DECREASES

Which direction does the demand

curve and supply curve shift?

Demand Now

Demand Later

Supply Now

Supply Later

P I P I

Q I Q D Q D Q I

Bails of HayThe price of hay is expected to increase.

(From $4 a bail now to $ 10 a bail in the future)

Expectations

The demand for bails of hay INCREASES

The supply for bails of hay DECREASES

The demand curve shifts to the RIGHT

The supply curve shifts to the LEFT

What happens to the equilibrium price

of the bail of hay?

Bails of Hay

The price of hay is expected to increase.(From $4 a bail now to $ 10 a bail in the future)

Expectations

The demand for bails of hay INCREASES

The supply for bails of hay DECREASES

The demand curve shifts to the RIGHT

The supply curve shifts to the LEFT

The equilibrium price of the bail of hay

will INCREASE.

Wooden Desks

The price of wood increases.

Is there a PYNTE variable?

Is there a SPENT variable?

Wooden Desks

The price of wood increases.

Is there a PYNTE variable? NO

Is there a SPENT variable? YES

What is the SPENT variable?

Wooden Desks

The price of wood increases.

What is the SPENT variable it?

S (supplier input costs)

What happens to the supply of wooden desks?

Wooden Desks

The price of wood increases.

S (supplier input costs)

What happens to the supply of wooden desks? DECREASES

Which direction does the supply curve shift?

Wooden Desks

The price of wood increases.

S (supplier input costs)

Supply of wooden desks DECREASES

The supply curve shifts to the LEFT

What happens to the equilibrium price and equilibrium quantity of the desks?

Wooden Desks

The price of wood increases.

S (supplier input costs)

Supply of wooden desks DECREASES

The supply curve shifts to the LEFT

The Equilibrium price (INCREASES)

Equilibrium quantity (DECREASES)

• “Help! Help! Here come the Bears”

--Hair Bear Bunch

Equilibrium Song

Equilibrium Song

• Figure out Demand, put it on the graph…

bum, bum, bum

• Figure out Supply, put it on the graph…

bum, bum, bum

Standards

• 6.2.12EF• 6.3.12DEF• 6.4.12DE• 6.5.12ABDF