AP Microeconomics

X Marks the Spot

Market Equilibrium

Our economy depends on the interdependence of suppliers and

demanders. Suppliers will enter the market knowing that prices of g&s must cover production costs and also yield profits. Demanders enter the market wanting to buy g&s with a price that is

practical and possible. A market is a place where firms and households come

together to exchange goods.

They both hold power:

therefore they together set the perfect [market] price.

1. What price producers are willing to offer outputs at? vs. What price consumers are willing to pay for that output?

2. What price are households willing to offer inputs at? vs. What price are firms wiling to buy?

Remember the Circular Flow?

Power Goes Both Ways!!

When these two meet at the market, one of three things happen: 1. The quantity demanded exceeds the

quantity supplied; resulting in a shortage

2. The quantity supplied exceeds the quantity demanded; resulting in a surplus

3. The quantity supplied equals the quantity demanded, the equilibrium.

Equilibrium

• the condition that exists when quantity supplied and quantity demanded are equal, it will “clear the market” because the price is perfect.

Let’s Do Some Graphing

• Label Price by $.50s

• Label Quantity by 3s

• Label your S, D, Price and Quantity

Bushels of OrangesPrice

in

Dollars

Quantity3 6 9 12 15 180

.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

D

SEquilibrium Price?

Equilibrium Quantity?

8

What would happen if price was set at $3?

• Excess Supply (surplus):

QS > QD.

Results of Surplus:• *Price Tends to Fall to clear the

market…meaning:• Law of Demand: Price ↓ QD ↑• Law of Supply: Price ↓ QS ↓

This will happen until QS = QD!

Bushels of OrangesPrice

in

Dollars

Quantity3 6 9 12 15 180

.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

D

SEquilibrium Price?

Equilibrium Quantity?

QS>QD

What would happen if price was set at $1.50?

• Excess Demand (shortage): QD > QS

• Results of Shortage:• *Price tends to Rise until the

market is cleared…meaning:• Law of Demand: Price ↑ QD ↓• Law of Supply: Price ↑ QS ↑This will happen until QS = QD!

Bushels of OrangesPrice

in

Dollars

Quantity3 6 9 12 15 180

.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

D

SEquilibrium Price?

Equilibrium Quantity?

QD>QS

• Keep in mind that changes in price result in changes of quantity supplied and quantity demanded (movements along the same curve

RULE:• If a new price is set above the

equilibrium price – then a surplus will result, until the market

corrects itself.

• If a new price is set below the equilibrium price – then a shortage will result, until the market

corrects itself.

Drawing the Market

Generic: a market must always have a firm’s supply and a household’s demand

Price

Quantity

S0

D0

EQUILIBRIUM POINTP0

Q0

Always use the proper numbers if you are given them…if not, then just use Ps and Qs.

Coffee Market, Price @ $2.50

Price

Quantity of Coffee

S0

D0

$2.50

Q0

Analyzing the Market

Quantity in hundreds

Price in thousands of dollars

2 4 6 8 10 12

5

10

15

20

25

30

35

1. What is the market price?

And at that price what quantity will

be sold?

$20,000

600

S0

D0

Quantity in hundreds

Price in thousands of dollars

2 4 6 8 10 12

5

10

15

20

25

30

35

Analyzing the Market

2. If price were raised to $25,000 how many cars would be demanded?

How many cars are supplied?

What is this called?

D0

S0

800 cars

400 cars

QS>QD = A Surplus of 400 Cars

Any Price set above equilibrium results

in a surplus

Quantity in hundreds

Price in thousands of dollars

2 4 6 8 10 12

5

10

15

20

25

30

35

Analyzing the Market

S0

D0

If price were changed to $10,000, what

would be the economic result?

There would be a shortage of 8,00 cars!!

• Demand: income & wealth, tastes & preferences, complements, substitutes, ∆ in expectations.

• Supply: cost of production, inputs, technology, productivity, government involvement, similar resources, numbers of sellers, ∆ in expectations

Factors other than price can change!!

RULES FOR CHANGES IN DEMAND

• If price was not a factor and supply stays constant, what would happen to price if demand increased?

Price

Quantity

D0

S

D1

PRICE & QUANTITY WILL BOTH INCREASE

P0

Q0

P1

Q1

RULES FOR CHANGES IN DEMAND

• If price was not a factor and supply stays constant, what would happen to price if demand decreased?

P

Q

D0

S

D1

P0

P1

Q1 Q0

PRICE & QUANTITY WILL BOTH DECREASE

RULES FOR CHANGES IN SUPPLY

• If price was not a factor and demand stays constant, what would happen to price if supply increased?

P

Q

D0

S1

S0

P0

P1

Q1Q0

PRICE WILL DECREASE AND QUANTITY WILL INCREASE

RULES FOR CHANGES IN SUPPLY

• If price was not a factor and demand stays constant, what would happen to price if supply decreased?

P

Q

D0

S1 S0

P0

P1

Q1 Q0

PRICE WILL INCREASE AND QUANTITY WILL DECREASE

Graphing Scenarios• Always start all

scenarios with this: Sentence to write:• ___________ will

__________, • due to _________,• {explain in your own

words};• as a result price will

_________.

P

S0

Q

D0

P0

Q0

Practicing Scenarios

• Coffee’s equilibrium price is $4.50 for a large. There is a hurricane in Brazil destroying the coffee bean plants. How will this affect price?

• There are 19,000 seats available in the HSBC Arena. The Sabres are on a hot streak; how will this affect price?

• Very few consumers are buying 35mm cameras anymore. How is this affecting the price of 35mm film?

Practicing Scenarios• William Ford, great-grandson of Henry and CEO

of Ford, approves the creation of a manufacturing plant in Bangalore (where they make good tea) and the hiring of 12,000 Indian workers. How will this affect the price of Ford cars?

• In an attempt to raise revenues, Time Warner authorizes raising the price of its television services to $15 per month up from the previous $65. What affect will this have?

• The iPhone is currently $399.99 at most stores and selling successfully (at equilibrium). Apple authorizes dropping the price to $199.99 for the holiday season. What affect will this have?

• A surplus results

• A shortage results

• The price of a two liter of soda is increased to $4.99 each.

• OPEC votes to increase the price of oil to $100 per barrel.

• A change in consumer income• A change in consumer tastes• An increase to the price of a substitute• A decrease of the price of a complement• A change in expectations• An apple a day keeps the doctors away• Affect on creamer when coffee triples in

price.

• A change in expectations• A change in the cost of production• Government subsidies on citrus• New health codes as set by the FDA• Frost of corn fields• New shoes stores open on Sheridan Drive• Kristen stops making pot holders and

starts making head bands