Market EquilibriumExploring Economics

Week 4 Seminar

• Define market equilibrium in the supply-demand model.

• Find equilibrium in the supply-and-demand diagram.

• Analyze changes in market equilibrium.

Learning Objectives

1. Divide into 6 groups.2. Groups present homework to

class.3. A Market Equilibrium Story4. Market Surpluses and Shortages

Agenda

With a negative sloping demand curve and a positive sloping supply curve for a product, an increase in consumer income will:

Question 1

A. increase equilibrium price and quantity if the product is a normal good.

B. decrease equilibrium price and quantity if the product is a normal good.

C. have no effect on equilibrium price and quantity.

D. reduce the quantity demanded but not shift the demand curve.

An improvement in production technology will:

Question 2

A. increase equilibrium price.B. shift the supply curve to the left.C. shift the supply curve to the right.D. shift the demand curve to the left.

Assume product A is an input in the production of product B. In turn product B is a complement to product C. We can expect a decrease in the price of A to:

Question 3

A. increase the supply of product B and increase the demand for product C.

B. decrease the supply of product B and increase the demand for product C.

C. decrease the supply of product B and decrease the demand for product C.

D. increase the supply of product B and decrease the demand for product C.

The equilibrium price is:Question 4

A. $4 B. $3 C. $2 D. $1

A market is in equilibrium:Question 5

A. provided there is no surplus of the product.B. at all prices above that shown by the

intersection of the supply and demand curves.

C. if the amount producers want to sell is equal to the amount consumers want to buy.

D. whenever the demand curve has a negative slope and the supply curve has a positive slope.

A surplus of a product will arise when price is:

Question 6

A. above equilibrium, with the result that quantity demanded exceeds quantity supplied.

B. above equilibrium, with the result that quantity supplied exceeds quantity demanded.

C. below equilibrium, with the result that quantity demanded exceeds quantity supplied.

D. below equilibrium, with the result that quantity supplied exceeds quantity demanded.

7. Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?

Question 7

A. An increase in supplyB. An increase in demandC. A decrease in supplyD. A decrease in demand

Which of the following statements is correct?

Question 8

A. If demand increases and supply decreases, equilibrium price will fall.

B. If supply increases and demand decreases, equilibrium price will fall.

C. If demand decreases and supply increases, equilibrium price will rise.

D. If supply decreases and demand remains constant, equilibrium price will fall.

This diagram shows demand and supply conditions in the competitive market for product X. If the initial demand and supply curves are D0 and S0, equilibrium price and quantity will be:

Question 9

A. F0 and C0 respectively.B. G0 and B0 respectively.C. F0 and A0 respectively.D. E0 and B0 respectively.

Refer to the above diagram, in which S1 and D1

represent the original supply and demand curves and S2 and D2 the new curves. In this market:

Question 10

A. supply has decreased and equilibrium price has increased.

B. demand has increased and equilibrium price has decreased.

C. demand has decreased and equilibrium price has decreased.

D. demand has increased and equilibrium price has increased.

Refer to the above diagram, in which S1 and D1

represent the original supply and demand curves and S2 and D2 the new curves. In this market:

Question 11

A. the equilibrium position has shifted from point M to point K.

B. an increase in demand has been more than offset by an increase in supply.

C. the new equilibrium price and quantity are both greater than they were originally.

D. point M shows the new equilibrium position.

Which of the below diagrams illustrate(s) the effect of an increase in automobile worker wages on the market for automobiles?

Question 12

A. Diagram (A)B. Diagram (B)C. Diagram (C)D. Diagram (D)

Please complete this short answer using both complete sentences and properly drawn graphs depicting any market changes.

Question 13

A drought in the southeast United States damages cotton crops. At the same time a boom in Australian cattle production causes the price for leather jackets to fall. Please draw a diagram how these changes may affect the Australian sweatshirt market and explain any potential changes using complete sentences.

Question 13A drought in the southeast United States damages cotton crops. At the same time a boom in Australian cattle production causes the price for leather jackets to fall. Please draw a diagram how these changes may affect the Australian sweatshirt market and explain any potential changes using complete sentences.

Please complete this short answer using both complete sentences and properly drawn graphs depicting any market changes.

Question 14

Xian and her new pop group, The Economists, featuring all electric guitar players, suddenly have inspired a new wave of Chinese youth to become interested in learning how to play the guitar. At the same time Gibson, Les Paul, and several other very large guitar manufacturers have declared bankruptcy. What influences will these events have on the Chinese guitar market? Please diagram any potential changes and explain using complete sentences.

Question 14Xian and her new pop group, The Economists, featuring all electric guitar players, suddenly have inspired a new wave of Chinese youth to become interested in learning how to play the guitar. At the same time Gibson, Les Paul, and several other very large guitar manufacturers have declared bankruptcy. What influences will these events have on the Chinese guitar market? Please diagram any potential changes and explain using complete sentences.

A Market Equilibrium Story

A Market Equilibrium Story1. First we will learn about a new world event. This

world event may be far away, but it can affect many industries and often this can happen in a chain reaction.

2. The class is divided into 6 groups. The students in each group work as economic analysts for an industry.

3. Each group will use their knowledge of the main event AND their new knowledge of changes in your classmate’s markets to predict any possible shifts in their industry’s supply curve, demand curve, and market equilibrium.

A Market Equilibrium StoryHere are the group assignments:

Group 1: CoalGroup 2: SteelGroup 3: AutomobilesGroup 4: Bicycles (aluminum frames)Group 5: Athletic clothingGroup 6: Flights to Hawaii

Group 1 will present first. Remember, market changes made by previous groups may affect your own market.

have suspended operations at their own costal

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries

A.U.N.P.S.

nuclear power stations while they review their Godzilla

defenseplans.

Group 1: Coal

Group 2: SteelGroup 3: Automobiles

Group 4: Bicycles (aluminum frames)

Group 5: Athletic/ exercise clothingGroup 6: Flights to Hawaii

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Group 1: Coal

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Group 1: Coal

Group 2: Steel

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Group 1: Coal

Group 2: SteelGroup 3: Automobiles

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Group 1: Coal

Group 2: SteelGroup 3: Automobiles

Group 4: Bicycles (aluminum frames)

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Group 1: Coal

Group 2: SteelGroup 3: Automobiles

Group 4: Bicycles (aluminum frames)

Group 5: Athletic/ exercise clothing

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Group 1: Coal

Group 2: SteelGroup 3: Automobiles

Group 4: Bicycles (aluminum frames)

Group 5: Athletic/ exercise clothingGroup 6: Flights to Hawaii

A Market Equilibrium StoryYesterday Godzilla, attracted by the radiation, rose from the ocean and attacked Aaron Ullman Nuclear Power Station in Hawaii. In response, many countries have suspended operations at their own costal nuclear power stations while they review their Godzilla defense plans.

A.U.N.P.S.

Market Surpluses and Shortages

Price Floor*: Sometimes an authority, such as a government, chooses to establish a “price floor.” This is an artificial price level that sellers in the marketare prohibited from sellingbelow.

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

PF

PF = Price Floor

Price Floor*: Sometimes an authority, such as a government, chooses to establish a “price floor.” This is an artificial price level that sellers in the marketare prohibited from sellingbelow.

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

What effect would this price floor PF have on the market?

PF

QDF QSFPF = Price FloorQDF = Quantity Demanded with a price floorQSF = Quantity Supplied with a price floor

Quantity demanded is less than quantity supplied, so there is a market surplus.

Price Floor*: Sometimes an authority, such as a government, chooses to establish a “price floor.” This is an artificial price level that sellers in the marketare prohibited from sellingbelow.

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

What effect would this price floor PF have on the market?

PF

QEQPF = Price Floor

There would be no effect, because the market equilibrium is above the price floor.

PEQ

PEQ = Equilibrium PriceQEQ = Equilibrium Quantity

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

Why might authorities sometimes find it useful to establish price floors?

PF

QDF QSF

PF = Price FloorQDF = Quantity

demanded with a price floor

QSF = Quantity supplied with a price floor

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

PC

PC = Price Ceiling

Price Ceiling*: Other times an authority may choose to establish a “price ceiling.” This is an artificial price level that sellers in the market are prohibitedfrom selling above.

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

What effect would this price ceiling PC have on the market?

PC

QDCQSC

PC = Price CeilingQDC = Quantity Demanded with a price ceilingQSC = Quantity Supplied with a price ceiling

Quantity supplied is less than quantity demanded, so there is a market shortage.

Price Ceiling*: Other times an authority may choose to establish a “price ceiling.” This is an artificial price level that sellers in the market are prohibitedfrom selling above.

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

What effect would this price ceiling PC have on the market?

PC

PC = Price Ceiling

Price Ceiling*: Other times an authority may choose to establish a “price ceiling.” This is an artificial price level that sellers in the market are prohibitedfrom selling above.

There would be no effect, because the market equilibrium is already below the price ceiling.

QEQ

PEQ

PEQ = Equilibrium PriceQEQ = Equilibrium Quantity

P

Q

¥

kilograms

demand

supply

Rice Market

Market Surpluses and Shortages

Why might authorities sometimes find it useful to establish price ceilings?

PC

QDCQSC

PC = Price CeilingQDC = Quantity

Demanded with a price ceiling

QSC = Quantity Supplied with a price ceiling

END