Module 7 Changes in Equilibrium. What you will learn in this Module: 1. How equilibrium price and...
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Module 7 Changes in Equilibrium
Module 7 Changes in Equilibrium. What you will learn in this Module: 1. How equilibrium price and quantity are influenced/affected when there is a change
What you will learn in this Module: 1. How equilibrium price
and quantity are influenced/affected when there is a change in
either supply or demand 2. How equilibrium price and quantity are
influenced/affected when there is a simultaneous change in both
supply and demand
Slide 3
What Happens When the Demand Curve Shifts? 3 Questions to ask
yourself: 1. What shifter is at work in the market? 2. What curve
is shifting and in which direction? 3. What happens to equilibrium
price and quantity? 4. Example: Tickets to a popular band. As the
band experiences more success and gets more air time on the radio,
they become more popular with fans. What happens to the price of a
concert ticket?
Slide 4
Concert Tickets Anyone? Increase in Demand Draw the market
demand curve for tickets to see this band. 1. Identify the original
price as Pe (equilibrium) and quantity of as Qe. 2. What shifter is
at work in the market? 3. What curve is shifting and in which
direction? 4. What happens to equilibrium price and quantity?
Slide 5
Concert Tickets Anyone? Increase in Demand Draw the market
demand curve for tickets to see this band. 1. Identify the original
price as Pe (equilibrium) and quantity of as Qe. 2. What shifter is
at work in the market? 3. What curve is shifting and in which
direction? 4. What happens to equilibrium price and quantity? 1)
Stronger taste for the band 2)Demand shifts right 3)Price and
quantity both increasewhy? Price Ticket Pe P1 QeQ1 D1 D2 S Shortage
Qty of Tickets An increase in demand Quantity rises Leads to a
movement along the supply curve to a higher equilibrium price and
higher equilibrium quantity E1 E2
Slide 6
Effects of a Decrease in Demand During a recession, people buy
fewer new cars. What happens to the price of a new car? Draw the
market for new cars. 1. Identify the original price as Pe and
quantity Qe. 2. What shifter is at work in the market? 3. What
curve is shifting and in which direction? 4. What happens to
equilibrium price and quantity?
Slide 7
Effects of a Decrease in Demand During a recession, people buy
fewer new cars. What happens to the price of a new car? Draw the
market for new cars. 1. Identify the original price as Pe and
quantity Qe. 2. What shifter is at work in the market? 3. What
curve is shifting and in which direction? 4. What happens to
equilibrium price and quantity? Price of cars Pe P1 Qe Q1 D1 D2 S
Qty of Cars A decrease in demand Quantity demanded falls Leads to a
movement along the supply curve to a lower equilibrium price and
lower equilibrium quantity E1 E2 Surplus 1) Lower income during a
recession. 2) Demand shifts to the left for normal goods. 3) Price
and quantity both decrease.
Slide 8
A Review: Write a test question that corresponds to what is
happening in these graphs.
Slide 9
Summary: Market Response to a Change in Demand 1. An increase
in demand leads to a rise in both e_____________p______ and the
e_____________ q____________supplied. 2. A decrease in demand leads
to a ______ in both the equilibrium price and the equilibrium
quantity supplied. Demand Equilibrium price & Qs Equilibrium
Price & Qs
Slide 10
Summary: Market Response to a Change in Demand 1. An increase
in demand leads to a rise in both equilibrium price and the
equilibrium quantity supplied. 2. A decrease in demand leads to a
fall in both the equilibrium price and the equilibrium quantity
supplied. Demand Equilibrium price & Qs Equilibrium Price &
Qs
Slide 11
What Happens When the Supply Curve Shifts? 3 questions to ask
yourself: 1. What shifter is at work in the market? 2. What curve
is shifting and in which direction? 3. What happens to equilibrium
price and quantity? Keep in mind when supply increases, it
increases horizontally (more quantity) not vertically.
Slide 12
Forever in Blue Jeans: Decreasing Supply 1. Example: Cotton is
a important raw material when making clothes like denim jeans. If
the global price of cotton rises, what happens to the price of
jeans? 2. Draw the market for jeans. Identify the original price as
Pe and quantity as Qe. 3. What shifter is at work in the market? 4.
What curve is shifting and in which direction? 5. What happens to
equilibrium price and quantity?
Slide 13
Forever in Blue Jeans: Decreasing Supply 1. Example: Cotton is
a important raw material when making clothes like denim jeans. If
the global price of cotton rises, what happens to the price of
jeans? 2. Draw the market for jeans. Identify the original price as
Pe and quantity as Qe. 3. What shifter is at work in the market? 4.
What curve is shifting and in which direction? 5. What happens to
equilibrium price and quantity? S1 1)Input price has increased
(cotton) 2)Supply of jeans shifts to the left 3)Price increases and
quantity supplied decreases. WHY? Price of jeans S D Pe P1 QeQ1 E
E2 Quantity of jeans Quantity supplied decreases
Slide 14
Corny Supply Curve Shifts: Increasing Supply 1. Production
technology has greatly improved agriculture, producing more corn on
the same amount of land. How has the better technology affected the
price of corn? 2. Draw the market for corn, Identify the original
price as Pe and quantity as Qe. 3. What shifter is at work in the
market? 4. What curve is shifting and in which direction? 5. What
happens to equilibrium price and quantity?
Slide 15
Corny Supply Curve Shifts: Increasing Supply 1. Production
technology has greatly improved agriculture, producing more corn on
the same amount of land. How has the better technology affected the
price of corn? 2. Draw the market for corn, Identify the original
price as Pe and quantity as Qe. 3. What shifter is at work in the
market? 4. What curve is shifting and in which direction? 5. What
happens to equilibrium price and quantity? Price of corn Quantity
of Corn Pe Qe D S S1 P1 Q1 E E1 1)Better technology leads to more
corn 2)Supply curve shifts to the right (growing) 3)Price decreases
and quantity supplied increases. WHY?
Slide 16
A Review: Write a test question that corresponds to what is
happening in these graphs.
Slide 17
Summary: Market Response to a Change in Supply 1. An increase
in supply leads to a ________ in the equilibrium price and a rise
in the equilibrium quantity. 2. A decrease in supply leads to a
rise in e_______________ p_______ and a rise in the
e_______________ q__________. Supply Fall in Equilibrium Price
& quantity Supply Rise in Equilibrium price & quantity
Slide 18
Summary: Market Response to a Change in Supply 1. An increase
in supply leads to a fall in the equilibrium price and a rise in
the equilibrium quantity. 2. A decrease in supply leads to a rise
in equilibrium price and a rise in the equilibrium quantity. Supply
Fall in Equilibrium Price & quantity Supply Rise in Equilibrium
price & quantity
Slide 19
Simultaneous Shifts of Supply & Demand Curves Four possible
scenarios. Graphs will follow. When there is both a demand and a
supply shift, here is a summary of what we can, and cannot,
predict. Demand and Supply move in opposite directions. When demand
increases and supply decreases, the equilibrium price rises but the
change in the equilibrium quantity is ambiguous.
Slide 20
Simultaneous Shifts of Supply & Demand Curves : Demand
Increases & Supply Decreases When demand increases and supply
decreases the equilibrium price definitely increases, but quantity
is ambiguous Ex: the demand for wheat increases AND the supply of
wheat decreasesthe result is a definite increase in the market
price, but an indeterminate change in quantity.
Slide 21
Simultaneous Shifts of Supply & Demand Curves: Demand
Decreases & Supply Increases When demand decreases and supply
increases the equilibrium price definitely decreases, but quantity
is ambiguous Ex: A decrease in the demand for pop music combined
with an increase in pop artists (think 1970s) would reduce the
market price but would have an indeterminate effect on the quantity
of pop music produced.
Slide 22
Simultaneous Shifts of Supply & Demand Curves Demand and
Supply move in the same direction When demand and supply increase,
the change in equilibrium price is ambiguous, but equilibrium
quantity definitely increases Ex: The recent Summer Olympics has
increased the popularity of volleyball and more companies have
begun producing volleyballs. How will these events affect the
market for volleyballs?
Slide 23
Simultaneous Shifts of Supply & Demand Curves: Both demand
and supply decrease When demand and supply decrease, the change in
equilibrium price is ambiguous, but equilibrium quantity definitely
decreases Example: a decrease in the demand for disco music
combined with a decrease in disco artists would result in a
definite decrease in the quantity of disco produced, but would have
an indeterminate effect on the price of the music.
Slide 24
Summary: Simultaneous Shifts of Supply & Demand Curves 1.
Demand and Supply move in opposite directions: Q_________ is
a_____________ 2. Demand and Supply move in the same direction:
E______________ p__________is a______________ Notes:
Slide 25
Summary: Simultaneous Shifts of Supply & Demand Curves 1.
Demand and Supply move in opposite directions: Quantity is
ambiguous 2. Demand and Supply move in the same direction:
equilibrium price is ambiguous Notes:
Slide 26
Simultaneous Shifts of Supply & Demand Curves The demand
for corn has increased due to the new government regulation that
gas must contain 10 % ethanol (ethanol is made from corn). The
supply for corn has decreased due to a massive drought in the
Midwestern US. How do these 2 events affect the market for corn?
Will supply decrease?
Slide 27
Simultaneous Shifts of Supply & Demand Curves The demand
for corn has increased due to the new government regulation that
gas must contain 10 % ethanol (ethanol is made from corn). The
supply for corn has decreased due to a massive drought in the
Midwestern US. How do these 2 events affect the market for corn?
Will supply decrease? Price Corn New E at a higher price Pe Qe
Quantity Corn D D2 S P1 Demand for corn rises Shortage due to
drought Supply falls?
Slide 28
A Way to Remember Demand & Supply Shifters TRICE Shifts
SUPPLY Technology Related Prices (complements & Substitutes)
Input prices Competition (# of producers) Expectations (of prices)
MERIT Shifts DEMAND Market Size (# of consumers ~ population)
Expectations (of prices) Related Prices (complements &
substitutes) Income (normal & inferior goods) Tastes of
Consumers
Slide 29
Demand & Supply Analysis: Fill in the blank. Be prepared to
draw the graph. The market for _______ EventShifter (s)Causes the
___________ curve to____ E Price _______ E Quantity __________ 1.
GasolineHurricane shuts down oil platforms in the gulf 2. Silly
bandsFriendship bracelets become a huge hit with teens 3.
MusselsDrought causes producers to exit the industry 4.
KeroseneWinter is coming. Gasoline production ramps down 5.
KeroseneWinter is coming 6. New Furniture Govt gives tax
rebates
Slide 30
Demand & Supply Analysis: Fill in the blank The market for
_______ EventShifter (s)Causes the ___________ curve to____ E Price
_______ E Quantity __________ 1. Gasoline 2. Friendship bracelets
3. Mussels 4. Kerosene 5. Kerosene 6. New Furniture Hurricane shuts
down oil platforms in the gulf Input pricessupply curve shift left
increasesdecreases Friendship bracelets become a huge hit with
teens Consumer tastes Demand curve to shift right
Increasesincreases Drought causes producers to exit the industry
Competition & Input prices Supply curve shifts left
Increasesdecreases Winter is coming. Gasoline production ramps down
Expectations of producer Supply shifts right decreasesIncreases
Winter is coming. People need warmth Consumer tastes Demand curve
to shift right Increases Govt gives tax rebates Income effect
Demand curve shifts right Increasesincreases
Slide 31
Module 7 Review p. 75-76 all questions Read Module 8 p.77-85
Finish Supply Activity Packet p. 29 31 & Strive for a 5
Slide 32
Module 8 Price Controls: Ceilings & Floors
Slide 33
What is the meaning of price control? How does the government
use them to intervene in markets? How do price controls can create
problems and make a market inefficient? Why are economists are
often deeply skeptical of attempts to intervene in markets? Who
benefits and who loses from price controls? Why they are used
despite their well-known problems? What you will learn in this
Module:
Slide 34
Why Do Governments Control Prices? 1. Unpopular market prices:
Examples? 2. Political pressure: Examples?
Slide 35
Why Do Governments Control Prices? 1. Unpopular market prices:
2. Sometimes when the market is efficient, it is judged as being
unfair to some groups. Usually those that are disadvantaged (poor)
and struggling to begin with. 3. Examples? 4. Political pressure:
make markets fair 5. Examples?
Terms to Know: Price Ceilings & Price Floors 1. Price
Control: Legal restrictions on how high or low a market price may
go. 2. Price Ceilings: Maximum price sellers are allowed to charge
for a good or service 3. Price Floors: minimum price buyers are
required to pay for a good or service Video Clips: price Ceilings
& Floors
Slide 38
Hit da Roof Thinkarama A price ceiling is a maximum price
sellers are allowed to charge for a good. Who would want such a
thing? (Ding! Ding! Ding!) Consumers, of course! Use your phone.
With a partner: Use the space below and answer the questions. 1.
What goods/services do you consider to be unfairly expensive? List
3. 2. Should the government enact a price ceiling for your good or
service? 3. Why or why not? 4. Be prepared to explain to the
class.
Slide 39
Price Ceilings 1. Legal maximum price typically imposed during
a crisis (wars, harvest failures, natural disasters) to keep
necessary goods and service available to the masses 2. With your
phone find examples.
Slide 40
Price Ceilings Legal maximum price typically imposed during a
crisis (wars, harvest failures, natural disasters) to keep
necessary goods and service available to the masses With your phone
find examples. 1. Raw Material prices during WWII 2. Oil Embargo in
1970s led to price controls 3. California electricity shortage 4.
New York City rent controlled apartments
Slide 41
Model of a Price Ceiling: Drawing Shortages 1. Pricing below
equilibrium will cause a shortage because __________will exceed
__________. (example: biscuits) 2. Shortage at Pc = Q___- Q___ 3.
If the Pc=$2, Qd =5.75 and Qs = 4 so there is a shortage of almost
2 biscuits. 4. Is this so bad? Arent consumers helped by this lower
price?
Slide 42
1. Pricing below equilibrium will cause a shortage because
demand will exceed supply. (example: biscuits) 2. Shortage at Pc =
Qd - Qs 3. If the Pc=$2, Qd =5.75 and Qs = 4 so there is a shortage
of almost 2 biscuits. 4. Is this so bad? Arent consumers helped by
this lower price? Yes, if you are among the lucky 4 who get
biscuits! Model of a Price Ceiling: Drawing Shortages
Slide 43
How a Does a Price Ceiling Cause Inefficiency In the Market?
1.Inefficient Allocation to Consumers: 2.Wasted Resources:
3.Inefficiently Low Quality: 4.Black Markets:
Slide 44
How a Does a Price Ceiling Cause Inefficiency In the Market?
1.Inefficient Allocation to Consumers: people who want the good and
are willing to pay the high price dont get it, & those who care
little about the product & are only willing to pay a small
amount get it 2.Wasted Resources: people expend money effort and
time to cope with the shortage caused by the price ceiling.
3.Inefficiently Low Quality: sellers offer a low quality product at
a low price even though buyers may prefer a high quality at a
higher price 4.Black Markets: market where goods & services are
bought and sold illegally (illegal product or the price charged is
prohibited by the price ceiling)
Slide 45
So WHY Are there Price Ceilings if They Are Inefficient? 1.
Benefit to some _______________: Consumers may have the
__________________to persuade government that the equilibrium price
is taking advantage of them. What kind of argument is this?
________________ 2. _________________________________: When price
ceilings have been in effect for a long time, buyers may not have a
realistic idea of what would happen without them. Examples??? 3.
Lack of _______________ _______________: Government officials often
do not understand supply and demand analysis (or they may but just
want to be re-elected)
Slide 46
So WHY Are there Price Ceilings if They Are Inefficient? 1.
Benefit to some consumers: Consumers may have the political clout
to persuade government that the equilibrium price is taking
advantage of them. What kind of argument is this? Normative 2.
Because it has always been done like that: When price ceilings have
been in effect for a long time, buyers may not have a realistic
idea of what would happen without them. Examples??? 3. Lack of
Economic Understanding: Government officials often do not
understand supply and demand analysis (or they may but just want to
be re-elected)
Slide 47
Graphing a Price Ceiling: TAXI!!!! 1. The City of San Francisco
places a limit on the amount taxis can charge at the airport below
equilibrium price. 2. Draw the correctly labeled market for taxi
transportation. Identify the original price ($30 per hr.) as Pe and
quantity as Qe (35 taxis) 3. Identify the price control at $10.00.
Label the price control. 4. Identify the result of the price
control in terms of Qd and Qs. 5. What is the difference between
quantity supplied and quantity demanded?
Slide 48
Graphing a Price Ceiling: TAXI!!!! 1. The City of San Francisco
places a limit on the amount taxis can charge at the airport below
equilibrium price. 2. Draw the correctly labeled market for taxi
transportation. Identify the original price ($30 per hr.) as Pe and
quantity as Qe (35 taxis) 3. Identify the price control at $10.00.
Label the price control. 4. Identify the result of the price
control in terms of Qd and Qs. 5. What is the difference between
quantity supplied and quantity demanded? 10 20 30 40 50 60 60 50 40
30 20 10 0 D S Price Ceiling Pe Qe Qd>Qs Shortage Price
Quantity
Slide 49
Changing Directions: Price Floors 1. Legal ______________price
that can be charged for a good or product. Used to push prices ____
instead of bring them ______. 2. Examples: 3. Explain the cartoons
on the right.
Slide 50
Changing Directions: Price Floors 1. Legal Minimum price that
can be charged for a good or product. Used to push prices UP
instead of bring them down. 2. Examples: 1. Agricultural products:
wheat, milk, corn 2. Trucking (phased out in 1980) 3. Air Travel
(phased out in 1978) 4. Minimum wage
Slide 51
Model of a Price Floor: Minimum Wages 1. Draw minimum wage
price floor 2. If wages are above equilibrium, the supply of labor
will be _____________. 3. The demand for labor by businesses will
______ because wages (an ________ cost) has been made artificially
_______.
Slide 52
Model of a Price Floor: Minimum Wages 1. Draw minimum wage
price floor 2. If wages are above equilibrium, the supply of labor
will be abundant or in surplus. 3. The demand for labor by
businesses will fall because wages (an input cost) has been made
artificially high. Pf
Slide 53
How Does A Price Floor Cause Inefficiency in the Market?
http://www.youtube.co m/watch?v=P8G1HIlRp po&safety_mode=true
&persist_safety_mode= 1&safe=active
Slide 54
How Does A Price Floor Cause Inefficiency in the Market? Price
floors lead to excess supply; the quantity supplied is greater than
quantity demanded 1. Inefficiently Low Quantity: 2. Inefficient
Allocation of sales Among Sellers: 3. Wasted Resources:
Slide 55
How Does A Price Floor Cause Inefficiency in the Market? Price
floors lead to excess supply; the quantity supplied is greater than
quantity demanded 1. Inefficiently Low Quantity: Since a price
floor raises the price of a good to consumers, quantity demanded
falls, so the quantity bought and sold falls, creating a loss to
society. 2. Inefficient Allocation of sales Among Sellers: Those
who would be willing to sell the good at the lowest price are not
always those who actually manage to sell it. The price floor has
just enabled a less efficient seller to make a sale, and might
force an efficient seller out of the market. 3. Wasted Resources:
Government price floors set above the equilibrium price cause
surpluses which the government may be required to buy and destroy.
Minimum wages result in fewer jobs available and so would-be
workers waste time searching for a job. What do we do with the
surplus food? Give it to lunch programs? Maybe they go to waste,
even if the government purchases them.
Slide 56
How Does A Price Floor Cause Inefficiency in the Market? 4.
Inefficiently High Quality: 5. Illegal Activity:
Slide 57
How Does A Price Floor Cause Inefficiency in the Market? 4.
Inefficiently High Quality: Sellers offer high-quality goods at a
high price, even though buyers would prefer a lower quality at a
lower price. The high price may induce suppliers to provide
extravagantly expensive ingredients that would be unprofitable at
the lower market price. Consumers would probably just rather have a
low-priced good without the fancy bells and whistles. If they were
really wanting expensive ingredients, their preferences would have
been reflected in a stronger demand curve to begin with and the
market price would have been higher. 5. Illegal Activity: Bribery
of sellers or government officials. Examples of working for less
than minimum wage (off the books) because there is a surplus of
labor willing to work. Minimum wage laws are an example of price
floors. Relatively high minimum wages in Europe lead to higher
levels of unemployment and black markets in labor. In contrast, the
minimum wage in the United States is set closer to the equilibrium
wage, and labor is relatively more productive in the United States.
http://www.huffington post.com/2013/08/21/m cdonalds-minimum-
wage_n_3790745.html
Slide 58
Soooo Why Are There Price Floors? 1. Benefit to some producers:
Producers may have the _________ ________to persuade government
that the equilibrium price is unfairly low. This is a
______________argument. 2. Price floors create a persistent
________ of the good. 3. ________ __________: There is also the
temptation to engage in illegal activity, particularly ________ and
corruption of government officials. http://www.cbsnews.co
m/8301-250_162- 57482105/top-15-super- pac-donors-through-
june/
Slide 59
Soooo Why Are There Price Floors? 1. Benefit to some producers:
Producers may have the political clout to persuade government that
the equilibrium price is unfairly low. This is a normative
argument. 2. Price floors create a persistent surplus of the good.
3. Black Markets: There is also the temptation to engage in illegal
activity, particularly bribery and corruption of government
officials. http://www.cbsnews.co m/8301-250_162-
57482105/top-15-super- pac-donors-through- june/
Slide 60
Graphing a Price Floor Husker Style 1. Farmers in the State of
Nebraska lobby Congress to pass a bill that makes sets the price of
corn above equilibrium price. 2. Draw the correctly labeled market
for corn, Identify the original price (3.00) as Pe and quantity as
Qe (4 bushels) 3. Identify the price control at $4.00. Label the
price control. 4. Identify the result of the price control in terms
of Qd and Qs. 5. What is the difference between quantity demanded
and quantity supplied?
Slide 61
Graphing a Price Floor Husker Style 1. Farmers in the State of
Nebraska lobby Congress to pass a bill that makes sets the price of
corn above equilibrium price. 2. Draw the correctly labeled market
for corn, Identify the original price (3.00) as Pe and quantity as
Qe (4 bushels) 3. Identify the price control at $4.00. Label the
price control. 4. Identify the result of the price control in terms
of Qd and Qs. 5. What is the difference between quantity demanded
and quantity supplied? 7654321076543210 1 2 3 4 5 6 7 D S Price
Floor Pe Qe Qd