EQUILIBRIUM, PRICE CONTROLS, & ELASTICITY

SSEMI2c, 3b: Explain and illustrate the effects of price floors and ceilings.

The intersection of supply and demand

Equilibrium Price

Where Demand and Supply Meet

Equilibrium is the point where Demand and Supply cross

Market equilibrium determines the price

At this price Qs = Qd Everyone prepared to buy at

that price gets what they want and everyone prepared to sell at that price does.

Market Equilibrium

s

d

Q

P

Pe

Qe

Market equilibrium Price occurs where Qd = Qs

• This occurs at Pe.

At this price, the market quantity, Qd and Qs, are the same (Qe).

Equilibrium is a state of balance. There are no shortages or surpluses.

Changes to equilibrium *A change to any of the variables that cause a shift in either demand or supply will cause a change in

the equilibrium price and quantity. *

Factors that shift the demand curve • N*I*C*E*S*T

Factors that shift the supply curve • S*T*E*P*I*N*G

Example – Changes in Demand

An increase in demand caused by an increase in consumer incomes

s

d

Q

Price ($)

Pe

Qe

d'

P1

Q1

At the new equilibrium prices have increased and quantity has increased

Example – Changes in Supply

A decrease in supply caused by cost of production increasing s

d

Price ($)

Pe

Qe

s’

Qe’

Pe’

At the new equilibrium price has increased and quantity has decreased

Excess Supply (Surplus)

0 Qd Qs Q

P

P*

At price p* quantity demanded (Qd) is less than quantity supplied (Qs).

There is an oversupply or surplus. (of Qs - Qd)

The market is in disequilibrium and is not stable.

Market forces ( excess supply) will tend to force prices down.

s

d

Excess Demand (Shortage)

0 Qs Qd Q

P

P*

S

D

At price P* quantity demanded is greater than quantity supplied.

There are shortages, not enough supply to meet demand

The excess demand tends to push prices up.

Price Controls

PRICE CONTROLSWho likes the idea of having a price ceiling on gas so prices will never go over $1 per gallon?

11

Price floors and ceilings

One common way to achieve social goals is to have the government set prices at “socially desirable” levels.

Qo

$5

4

3

2

1

P

10 20 30 40 50 60 70 80 13

D

S

Shortage(Qd>Qs)

Maximum legal price a seller can charge for a product.Goal: Make affordable by keeping price from reaching Eq.

GasolineDoes this

policy help consumers?

Result: BLACK

MARKETSPrice Ceiling

Price Ceiling

To have an effect, a price ceiling must be

below equilibrium

Shortage Shortage: a situation where the Qd > Qs

(at a given price)

Example of Price Ceiling Some cities like New

York, have rent controls.

In some buildings a certain percentage of apartments must be offered at a very low price.

This creates a surplus of people wanting these apartments.

Qo

$

4

3

2

1

P

10 20 30 40 50 60 70 80 16

D

SSurplus(Qd<Qs)

Minimum legal price a seller can sell a product.Goal: Keep price high by keeping price from falling to Eq.

Corn

Does this policy help

corn producers?

Price Floor

Price Floor

To have an effect, a price floor must be

above equilibrium

Price Floors create a Surplus Surplus: a situation in which Qs > Qd (at

a given price) Result: Suppliers have extra goods and

services.

Example of Price Floor Minimum wage – the least amount an

employer can pay a worker Price Floors create a surplus of

workers, leaving many people without a job.

…. A short story

Price Controls

Moving on to Elasticity……

Elasticity of Demand

Who cares?• Elasticity is used by businesses to help

determine market prices.

Elasticity of Demand- • Measurement of consumers

responsiveness to a change in price.

Firms must ask: What will happen if price increase? How much will it effect Quantity Demanded?

Inelastic demand…. INelastic = Insensitive to a change in

price. If price increases, quantity demanded will

fall a little If price decreases, quantity demanded

increases a little. In other words, people will continue to buy

it.

Inelastic demand…. General Characteristics of INelastic

Goods: Few Substitutes The products are necessities Required now, rather than later

Examples: Medical care, chewing gum

Elastic Demand… Elastic = Sensitive to a change

in price. If price increases, Qd will fall a lot If price decreases, Qd increases a lot. In other words, the amount people buy

is sensitive to price.

Elastic Demand…. General Characteristics of Elastic Goods:

Many Substitutes Luxuries Large portion of income Plenty of time to decide

Examples: soda, boats

Elastic vs. Inelastic To determine if a product is elastic or

inelastic you will ask yourself 3 questions: Can the purchase be delayed? Is the product a large portion of my

income? Are their substitutes?

If you can answer “yes” to 2 or more, the product/service is considered elastic.

Elastic or Inelastic?

Beef- Gasoline-

Real Estate- Medical Care-

Electricity- Gold-

Elastic INelastic Elastic InelasticINelastic Elastic

What about the demand for insulin

for diabetics?

Price Elasticity of Supply Price elasticity of supply is a measure of

how much the quantity supplied of a good responds to a change in the price of that good.

1. Ability of sellers to change the amount of the good they produce.

Beach-front land is inelastic. Books, cars, or manufactured goods are

elastic.2. Time period

Supply is more elastic in the long run.