Equilibrium

1. Equilibrium Unit Four, Lesson One Cook

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.

3. 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.

7. Surplus and Shortage • Let’s say the market price is set above equilibrium:

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)

14. Surplus and Shortage • This will go on, little by little, until equilibrium is reached:

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