Macro: Market Equilibrium

Disequilbriums

-Surpluses -Shortages

Tax Revenue = Tax amount * Qt

Tax revenue for the government is created. The amount of revenue will be equal to the amount of the tax multiplied by the quantity of units sold.

Change in Equilibrium

-Change in Demand -Change in Supply - Complex changes

Which of the following statements does not describe equilibrium?

-Quantity demanded equals quantity supplied at the same price. -The market is in balance. -There are no shortages or surpluses. -Equilibrium is a goal that is seldom achieved in the real world.*******

Price Ceilings

A maximum legal price at which a good, service, or resource can be sold

Price Floor

A minimum legal price at which a good, service, or resource can be sold

Market = Qs - Qd (if positive, we have a surplus)

If quantity supplied is larger than the quantity demanded we will get a positive number in the equation above. This number is the amount of the surplus or excess supply

Where does the market equilibrium occur? How do we show this graphically?

Equilibrium occurs where the quantity demanded equals the quantity supplied, at a price referred to as the equilibrium price. The market is in balance at equilibrium and produces a quantity that corresponds to the equilibrium price. Graphically, this happens where the demand curve and supply curve cross.

Market = Qs - Qd (If negative, we have a shortage)

If quantity demanded is larger than the quantity supplied we will get a negative number in the equation above. This absolute number of this amount is the amount of the shortage or excess demand.

A Tax on Suppliers

The tax increases the price suppliers must pay at every quantity.

Taxes on products:

increase the marginal cost for producers

A Tax on Demanders

shifts the demand curve to the left

Who sets prices?

-buyers and sellers do not set prices -It is the interaction of buyers and sellers that set prices. Similar to both blades of scissors cutting, both the supply curve and the demand curve determine prices.

Surplus

If the price is set too high, we will see many producers wanting the provide the product but not enough consumer desire to met that quantity supplied. This is a surplus: a situation in which the quantity of output supplied is greater than the quantity of output demanded at the current market price. This is also called excess supply

Shortage

If the price is set too low, we will see many consumers wanting the product but not enough product supplied to meet the quantity demanded. This is a shortage: a situation in which the quantity of output demanded is greater than the quantity of output supplied at the current market price. This is also called excess demand

What happens when supply and demand change?

It will depend on many things. -Shapes of the supply and demand curves -Intensity of the change -Direction of the change.

Example: Local regulators don't think it is fair to charge poor college students $6 a slice for pizza. They set a price ceiling of $3 per slice of pizza.

Many will think this is a good regulation because it lowers the price of pizza, however, the price change is not the only change within the situation. Using the economic tool of supply and demand we can analyze what is likely to occur and get a better understanding of the regulation.

Discuss how price ceilings work. How do price ceilings get established? What conditions must exist for a price ceiling to be binding? What is the result of a price ceiling that is binding?

Price ceilings occur when government intervenes in the market place. As a result, the market forces of supply, demand, and flexible prices are prevented from determining an equilibrium price. Instead a price that is below the market price is established by government as the official price. For a price ceiling to be binding, it must be lower than the market price. When price ceilings are operational, the result is a shortage. At the lower price, buyers want to purchase more quantities than suppliers want to supply. Ex. rent control, wage and price controls of WWII.

Discuss how price floors work. How do price floors get established? What conditions must exist for a price floor to be binding? What is the result of a price floor that is binding?

Price floors occur when government intervenes in the market place. As a result, the market forces of supply, demand, and flexible prices are prevented from determining an equilibrium price. Instead a price that is above the market price is established by government as the official price. For a price floor to be binding, it must be higher than the market price. When price floors are operational, the result is a surplus. At the higher price, suppliers want to supply more quantities than buyers want to purchase. Ex. Farm price supports and minimum wage

Incidence of Taxation

Refers to who bears the economic burden of a tax. The economic entity bearing the burden of a particular tax will depend on the price elasticities of demand and supply.

Discuss the results of a tax on suppliers and a tax on buyers. What formula is used to calculate the amount of tax revenue?

Taxes on products increase the price that buyers pay. Taxes on suppliers increase the marginal cost for producers and reduce the price that sellers receive. The tax causes the demand curve to shift left and the new equilibrium quantity will be lower than before the tax. As a result, both buyers and sellers are impacted by the tax. To calculate the amount of tax revenue collected use this formula: Number of units sold × tax per unit = government's tax revenue.

Discuss how the equilibrium price and quantity change when a change in demand occurs and the supply stays constant

The equilibrium price and quantity both change in the same direction of a demand change. If there is an increase in demand, the equilibrium price and equilibrium quantity both increase. If there is a decrease in demand, the equilibrium price and equilibrium quantity both decrease

who creates price ceilings?

The government will usually create a price ceiling when they would like to make the good under consideration available to low income consumers or if they simply believe that the price of the good is unfairly high and there is an ethical principal to keep the price below a certain threshold

Who creates a price floor?

The government will usually create a price floor when they would like to make providing the good under consideration more lucrative to those providing it because they feel the market clearing price is unfair or unjust in some manner

Change in Demand

When demand increases, the entire market is affected and must change. Whenever there is a shortage, meaning quantity demanded is greater than quantity supplied, what is the market response to the situation? There is upward pressure on the price. At the current price the quantity demanded is telling suppliers to make more of the good. But for suppliers to make more, the consumers have to be willing to pay more

For a price floor to be binding it must...

be higher than the equilibrium price

For a price ceiling to be binding it must...

be lower than the equilibrium price.