test1

1
Determining Price Equilibrium
2
Outline

• Students should understand how the interaction
  of demand and supply determines equilibrium
  prices in a market economy. They should
  understand the difference between equilibrium and
  disequilibrium, and between excess demand and
  excess supply.

3
Definitions

• Equilibrium Where demand equals supply at that
  price so that there is no shortage, surplus or
  tendency to change.
• Surplus Where there is an excess of supply over
  supply.
• Shortage Where there is an excess of demand
  over supply

4
Revision Functions of Prices

• What are the 3 functions of prices? Solve the
  anagram to find out.

Rationing
Incentive
Signalling
Grain Into
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• As a resource begins to run out, the price rises.
• Demand falls
• The higher price means that only producers
  creating the products that consumers most want
  (and will pay for) will be able to afford to pay
  for it
• This preserves the resource for its most valued
  use.

The prospect of increased profit means that firms
not only have knowledge of the shortage but also
the incentive to increase production.
The rise in price lets producers know that there
is a shortage.
Align Sling
Ten In Vice
5
Equilibrium

• Price starts too high. There is disequilibrium
• At this price there is a surplus.
• This signals producers to lower the price to sell
  the surplus.
• This causes an extension in demand and a
  contraction in supply as firms no longer have the
  incentive to produce as much.
• Price continues to fall until equilibrium is
  reached.

Price
Supply
P
Demand
Qs
Q
Qd
Quantity
Surplus
6
Equilibrium

• Price starts too high. There is disequilibrium
• At this price there is a surplus.
• This signals producers to lower the price to sell
  the surplus.
• This causes an extension in demand and a
  contraction in supply as firms no longer have the
  incentive to produce as much.
• Price continues to fall until equilibrium is
  reached.

How would the market eliminate excess demand?
Price
Supply
P
Demand
Q
Quantity
7
Demand Shifts
What would happen to the market for umbrellas if
a wet winter were forecast?

• More umbrellas would be demanded at the same
  price (D1 to D2)
• This leads to a shortage (Q2-Q1)
• The price rises, causing a contraction in demand,
  rationing scarce resources.
• This acts as a signal to producers to increase
  production, leading to an extension in supply
• A new equilibrium is established at P3 Q3

Price
Supply
P3
P1
D2
D1
Q1
Q3
Q2
Quantity
8
Demand Shifts
What would happen to the market for umbrellas if
a wet winter were forecast?
What would happen to the market for fast food if
the minimum wage rose?

• More umbrellas would be demanded at the same
  price (D1 to D2)
• This leads to a shortage (Q2-Q1)
• The price rises, causing a contraction in demand,
  rationing scarce resources.
• This acts as a signal to producers to increase
  production, leading to an extension in supply
• A new equilibrium is established at P3 Q3

Price
Supply
P3
P1
D2
D1
Q1
Q3
Q2
Quantity
9
Consumer and Producer Surplus

• Consumer surplus is the free benefit consumers
  gain, over and above what they paid for.
• Producer surplus is the extra payment producers
  receive over and above what they would have
  accepted.
• Together they are referred to as community
  surplus.

Price
Supply
P
Demand
Q
Quantity
10
ACE Diagrams

• Any diagram in Economics should be ACE
• Axis
• Curves
• Equilibriums
• Should all be drawn and carefully labelled, with
  units where appropriate.

11
Derived Demand

• Derived demand occurs when demand for a good or
  service results solely from demand for another
  good or service.
• If demand for the desired good increases then
  demand for the derived good will also increase

Coal
Coal Miners
Price
Price
S
S
P2
P2
P1
P1
D2
D2
D1
D1
Quantity
Q1
Q2
Quantity
Q1
Q2
12
Joint Supply

• Joint supply occurs when producing one good or
  service leads to the production of another.
• If demand for one of these goods increases,
  supply of the other will also increase.

Beef
Leather
Price
Price
S
S1
P2
P1
P1
S2
P2
D2
D1
D
Quantity
Q1
Q2
Quantity
Q1
Q2
13
Joint Supply

• Joint supply occurs when producing one good or
  service leads to the production of another.
• If demand for one of these goods increases,
  supply of the other will also increase.

Extension TED Talks Pigs http//www.ted.com/tal
ks/christien_meindertsma_on_pig_05049.html
Beef
Leather
Price
Price
S
S1
P2
P1
P1
S2
P2
D2
D1
D
Quantity
Q1
Q2
Quantity
Q1
Q2