Market Equilibrium and Policy

When there is an increase in demand and increase in supply -Eq price -Eq quantity

-Eq price --> ? -Eq quantity --> increases

When there is an decrease in demand and increase in supply -Eq price -Eq quantity

-Eq price --> decrease -Eq quantity --> ?

When there is an increase in demand and decrease in supply -Eq price -Eq quantity

-Eq price --> increases -Eq quantity --> ?

Price ceiling Price floor

A price ceiling leads to a shortage --> because suppliers won't produce enough goods to meet demand unless the price is allowed to rise above the ceiling. Price floor leads to a surplus --> because suppliers produce more goods than are demanded unless the price is allowed to fall below the floor.

When there is an decrease in demand and decrease in supply -Eq price -Eq quantity

Eq price --> ? -Eq quantity --> decreases

Calculate the magnitude of a surplus or shortage using supply and demand

Surplus = Quantity supplied (Qs) > Quantity demanded (Qd) In our example, the current market equilibrium price is $1.20 per bar. Prices above $1.20 per bar would result in a surplus, while prices below $1.20 per bar would result in a shortage.

Use supply and demand to determine the effect of a tax paid by buyers on the price and quantity of a good; be able to determine the price buyers pay, the price sellers pay, the burden of tax on buyers, the burden of tax on sellers.

Tax means --> downward shift in the demand curve leads to a decline in the equilibrium price. If the government increases the tax on a good, that shifts the supply curve to the left, the consumer price increases, and sellers' price decreases.

How does demand and supply interact to determine an equilibrium price and quantity?

The equilibrium price is the only price where the desires of consumers and the desires of producers agree—that is, where the amount of the product that consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied).

Use supply and demand to determine the impact of a price floor on price and quantity of a good; be able to calculate any resulting shortage od surplus

price floor keeps a price from falling below a given level When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. --> Price floors and price ceilings often lead to unintended consequences.

Use supply and demand to determine the impact of a price and quantity of a good; be able to calculate any resulting shortage or surplus

produces more than the quantity demanded (surplus) Qs > Qd Quantity supplied is less than quantity demanded (shortage) Qd > Qs

Use supply and demand to determine the effect of a tax paid by suppliers on the price and quantity of a good; be able to determine the price buyers pay, the price sellers pay, the burden of tax buyers, the burden of tax on sellers.

the supply curve shifts up by the amount of the tax --> rise in the equilibrium price --> decline in the equilibrium quantity