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Market Equilibrium Mr. Barnett
University High SchoolAP Economics
Market Equilibrium
In a competitive market [many buyers and sellers] the price of a good serves as a rationing mechanism
Consumer Surplus
Remember the concepts of marginal cost and marginal benefit◦Marginal cost – ◦Marginal benefit –
At the last unit purchased, the price the consumer pays (their marginal cost) equals the amount they are willing to pay (marginal benefit)
Producer Surplus
The marginal cost of producing a good or service is represented by the supply curve
The marginal benefit for a supplier is the price received from the sale of the product
Thus, producer surplus is the difference between the price and the supply curve◦the additional return to producers above what they
would require to produce that quantity of goods
Disequilibrium - Surplus
Market Surplus◦If market price is above equilibrium◦Quantity supplied > Quantity demanded
Disequilibrium - Shortage
Market Shortage◦If market price is below equilibrium◦Quantity demanded > Quantity supplied
Demand Decrease◦Less quantity demanded at every price◦Surplus at current price that causes pressure
for price to decrease
Demand Increase ◦More quantity demanded at every price◦Shortage at current price that causes pressure
for price to increase
Supply Decrease◦Less quantity supplied at every price
Supply Increase◦More quantity supplied at every price
Double Shifts ◦??? Are cases where the results are
indeterminate◦When double shifts occur, something [the effect
on price or quantity] will be indeterminate
(b) Use a new graph to show what happens in the wheat market if the cost of fertilizer used in the production of wheat increases, and if the government announces that the consumption of wheat products greatly reduces the risk of having a heart attack. Explain the impact these events will have on each of the following.
(i) Market price of wheat
(ii) Industry output of wheat
S
D
P
P
S1
P1
Q1
Cost of fertilizer increases.This shifts supply to the left, causing theprice to go up and the output to go down.
Wheat greatly reduces the risk of heart attack.
Demand for wheat increases causing thedemand curve to shift to theright.
D1
P1
Price goes up and quantitygoes up.
For the combination of supplydecreasing and demand increasing, P definitely goes up,while Q is indeterminate.
Q2
Other Examples◦How will a heat wave and a hurricane in the
same summer affect ice cream market?◦How does Super Bowl advertising (very
expensive) affect the beer market?
Steps◦Determine whether the event shifts the supply
or demand curve (or both)◦Decide in which direction the curve(s) shift◦Use the supply and demand diagram to see
how the shift(s) change the equilibrium price and quantity
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