Supply and Demand: Surplus and Shortage
Supply & Demand
● P1 was the market clearing price, but then one of determinants of demand changed and D↑
● P2 is the new market clearing price
Surplus & Shortage
● results in a new market clearing price and quantity
● consumers bid up prices that are too low to clear the market
● suppliers put products “on sale” when prices are too high to clear the market
Surplus
Qs>Qd
Shortage
Qd>Qs
● when P=P1 the Demand is to purchase
Q1
● but the suppliers are channeling a lot of their goods
● usually pressure by suppliers
○ ↓ pressure on price
● when price too low
● low price firms should be really using resources on something else
● ↑ pressure on price
Price Ceilings and Price Floors
● price is the signal for buyers and sellers
○ a price is too high surplus
○ a price is too low shortage
● artificial prices are “false signals” that have unintended consequences
● other forms of rationing will be used if price cannot adjust
Ceiling
Floor
● maximum legal price
● example: rent control
● minimum legal price
● example: minimum wage
Determinants of Demand
Peter Piper Picked Yummy Not To Eat
● Price
○ determines Qd, not determinant of D
● Price of substitute(ps)
○ if ps ↑ less likely to buy substitute so D for good ↓
● Price of compliment(pc)
○ if pc ↑ less likely to buy combo so D for good ↑
● Y/income
○ if y ↑ more able to buy more(normal goods) so D for good ↑
● Number of buyers(#b)
○ #b ↑ the D for good ↑
● Taste & preferences(t)
○ varies can affect taste by ads
○ t ↑ then D ↑
● Expectations
○ if we expect P for good to ↑ in future, more likely to purchase now Determinants of Supply
WE PoT PiNG
● Weather(w)
○ if w good and it matters in the production of good, then supply for good ↑
● Expectations
○ if expect P ↑ in future, might be more likely to wait and sell
● Price of other related goods(po)
○ the firm could make with other similar resources if po ↑ more likely to shift
● P1 was the market clearing price, but then one of determinants of demand changed and D↑
● P2 is the new market clearing price
Surplus & Shortage
● results in a new market clearing price and quantity
● consumers bid up prices that are too low to clear the market
● suppliers put products “on sale” when prices are too high to clear the market
Surplus
Qs>Qd
Shortage
Qd>Qs
● when P=P1 the Demand is to purchase
Q1
● but the suppliers are channeling a lot of their goods
● usually pressure by suppliers
○ ↓ pressure on price
● when price too low
● low price firms should be really using resources on something else
● ↑ pressure on price
Price Ceilings and Price Floors
● price is the signal for buyers and sellers
○ a price is too high surplus
○ a price is too low shortage
● artificial prices are “false signals” that have unintended consequences
● other forms of rationing will be used if price cannot adjust
Ceiling
Floor
● maximum legal price
● example: rent control
● minimum legal price
● example: minimum wage
Determinants of Demand
Peter Piper Picked Yummy Not To Eat
● Price
○ determines Qd, not determinant of D
● Price of substitute(ps)
○ if ps ↑ less likely to buy substitute so D for good ↓
● Price of compliment(pc)
○ if pc ↑ less likely to buy combo so D for good ↑
● Y/income
○ if y ↑ more able to buy more(normal goods) so D for good ↑
● Number of buyers(#b)
○ #b ↑ the D for good ↑
● Taste & preferences(t)
○ varies can affect taste by ads
○ t ↑ then D ↑
● Expectations
○ if we expect P for good to ↑ in future, more likely to purchase now Determinants of Supply
WE PoT PiNG
● Weather(w)
○ if w good and it matters in the production of good, then supply for good ↑
● Expectations
○ if expect P ↑ in future, might be more likely to wait and sell
● Price of other related goods(po)
○ the firm could make with other similar resources if po ↑ more likely to shift