Market Equilibrium and Price Controls

Market Equilibrium and Price Controls

Equilibrium

Equilibrium occurs where the supply curve and the demand curve intersect. The resulting price is called the Equilibrium Price (Pe). At the equilibrium price the seller and the buyer are both willing to do business.

Market Equilibrium

Consumer and Producer Surplus

When market equilibrium occurs, benefits from trade for both the buyer and seller (consumer and producer) are maximized. The benefit for the buyer is called Consumer Surplus. The consumer surplus is the difference between the maximum amount a buyer is willing to pay for a good, and the amount that they actually paid for the good. The benefit for the seller is called Producer Surplus. The producer surplus is the different between the lowest amount that a seller will sell for, and the amount that they actually paid for it.

Price Controls

Price Controls are minimum and maximum prices set by a government. Example: If a maximum price is set for steak, more buyers will have the money required to buy it. This maximum set price is called a price ceiling. However, if this price ceiling is below the market equilibrium, whats known as a shortage will occur. 

Price ceiling set at Pc and resulting shortage.

A Price Floor is the opposite of a price ceiling. A price floor is a set minimum price at which a buyer may purchase a good. If the price floor is above the equilibrium price a surplus will result.

Price floor set at Pf and the resulting Surplus.

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Disclaimer: As the owner/author, I am the legal copyright holder of the material on this blog, and it may not be used, reprinted, or published without my written consent. The information provided in this blog is for entertainment purposes only. I am not providing any kind of professional advice. Readers are reading and/or using any information contained in this blog at their own risk. I reserve the right to change the focus of the blog, to shut it down, to sell it, or to change the terms of use at my discretion. I am not responsible for the actions of the advertisers or sponsors. If you purchase a product or service based upon a link from the blog, the reader must take action with that company to resolve the issue, not me. I am not responsible for the content contained in external links, or any damage resulting from proceeding to them. I am not responsible for the privacy practices of advertisers or blog commenters.

Supply and Demand: The Bread and Butter of Economics

Demand

Demand is the buyer's eagerness to buy a product. Demand varies depending on the price of a product. This concept is represented by what is known as a demand schedule.

Demand Schedule for Soda

Price per Can	Quantity of Cans Demanded
10 ₵	5
20	4
30	3
40	2
50	1

The inverse relationship between the price of a product and the demand of the product is known as the Law of Demand. The law of demand can be illustrated graphically by what is known as a Demand Curve.

Basic Demand Curve

What Can Happen with Demand?

1. Change in quantity demanded. This occurs when there is a change in the price of the good. This results in movements up or down the demand curve. 

An increase in price results in movement up the demand curve.
If price decreased, movement done the curve would occur.

2. Change in demand. This can result from a number of factors such as more consumers interested in buying the good, higher income in the population, the cost of comparable goods, etc.

An increase in demand causes the whole demand curve to shift to the right.
If demand decreased, the demand curve would shift to the left.

Supply

Supply is the amount of a product that the seller is willing to sell. Unlike the law of demand, the Law of Supply doesn't follow an inverse relationship. As the price increases, the quantity supplied increases.

Supply Schedule for Soda

Price per Can	Quantity of Cans Supplied
10 ₵	2
20	3
30	4
40	5
50	6

The supply schedule can be graphically represented by the Supply Curve.

Basic Supply Curve

What can happen with supply?

1. Change in quantity supplied. This occurs when there is a change in the price of a good. This results in a movement up or down the supply curve.

An increase in price results in movement up the supply curve.
If price decreased, movement done the curve would occur.

2. Change in supply. This can result from a number of factors such as the number of producers, improvements in technology, government regulations, etc.

An increase in supply causes the whole supply curve to shift to the right.
If supply decreased, the supply curve would shift to the left.

In this post Market Equilibrium and Price Controls we will be examining what you can do by combining the supply and demand curves.

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Disclaimer: As the owner/author, I am the legal copyright holder of the material on this blog, and it may not be used, reprinted, or published without my written consent. The information provided in this blog is for entertainment purposes only. I am not providing any kind of professional advice. Readers are reading and/or using any information contained in this blog at their own risk. I reserve the right to change the focus of the blog, to shut it down, to sell it, or to change the terms of use at my discretion. I am not responsible for the actions of the advertisers or sponsors. If you purchase a product or service based upon a link from the blog, the reader must take action with that company to resolve the issue, not me. I am not responsible for the content contained in external links, or any damage resulting from proceeding to them. I am not responsible for the privacy practices of advertisers or blog commenters.