DISEQUILIBRIUM(continued)

WARM UP:1. Write your name on the small piece of paper

on your desk. !

2. When I say “GO” - find 4 different partners: sign your names on each other’s paper next to

one of the keywords: “opportunity cost,” “incentive,” and “demand.”

!

* You are not allowed to trade signatures with someone sitting next to you!

EQUILIBRIUM PRICE:The price where quantity

demanded (Qd) is equal to quantity supplied (Qs).

Q

P

We indicate equilibrium

price with “P” and a “star”

EQUILIBRIUM QUANTITY:The quantity (Q) at which quantity

demanded (Qd) and quantity supplied (Qs) are equal at a certain price (P).

Q

P

We indicate equilibrium

quantity with “Q” and a

“star”

EQUILIBRIUM STATE:The combination of price (P) and quantity (Q) where there is no

economic pressure from extra demand or extra supply.

Q

P

DISEQUILIBRIUM STATE:When the market is outside of

equilibrium. In other words, when there is a surplus or shortage of goods.

Qs

P

Qd Qd

P

Qs

Qs

P

Qd

(Don’t answer out loud!)

Does this graph represent a

a surplus or a shortage? and…

How do you know?

Does this graph represent a

a surplus or a shortage? and…

How do you know?

Answer the following question:

Qs

P

Qd

(Don’t answer out loud!)

Does this graph represent a

a surplus or a shortage? and…

How do you know?

Answer the following question:

Classroom Projectors

20406080100120140

100 500 1000 1500

S

D

Q (in thousands)

P

Answer the following questions:

What is the equilibrium price? What is the equilibrium quantity?

Classroom Projectors

20406080100120140

100 500 1000 1500

S

D

Q (in thousands)

P

Answer the following questions:

Name a price that would result in a shortage. Name a price that would result in a surplus.

CONSUMER SURPLUS:(buyer)

The benefit consumers receive from buying a good/service, measured by what the individuals

would have been willing to pay minus the amount they actually paid.

I wanted to buy an apple, and I was willing to pay $3.00 to get it. I bought an apple for $2.50!

My consumer surplus for this purchase is .50¢

PRODUCER SURPLUS:(seller)

The benefit producers receive from selling a good/service, measured by the price they

actually received minus the price they would have been willing to accept.

I wanted to sell an apple, and I was willing to sell it for $1.00. I sold an apple for $2.50!

My producer surplus for this sale is $1.50

CONSUMER & PRODUCER SURPLUS:It doesn’t represent

actual money we have saved or made, because the buyer has still spent money and the seller

has not made any additional money.

Instead, it’s a theoretical benefit we receive.

We’re all happy because we have more money than we might

have had if the transaction went differently

* An auction can potentially eliminate consumer surplus for the individual who wins.

P

Q

S

D

This area on the graph represents

consumer surplus for the whole market

This area on the graph represents producer surplus

Both areas combined is called social surplus.

P

Q

S

D

These are all the people demanding the product at a price higher than equilibrium

These are all the people willing to

supply the product at a price lower than equilibrium

Q

S

D

P2

P

!

If the price is at equilibrium, All of the people who

were willing to pay more have received a

consumer surplus.

A person willing to pay the higher price

of P2 saved the difference between

P2 and the current market price.

!

Q

S

D

50

100

If the producer was willing to sell at $50, but he sells at the price of $100, he receives

a producer surplus of $50.

Answer the following question:

Calculate the consumer and producer surplus in this sale:

I sold a car for $13,500.

!

I was willing to sell it

as cheap as $11,000!

I bought a car for

$13,500! !

I was willing to buy it for up to $14,000.