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Lecture 5

Lecture 5-Equilibrium in Competitive Markets

5 Pages
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Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

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Tuesday, September 29, 2009.
Equilibrium in Competitive Markets
1. The equilibrium price occurs where quantity demanded is equal to quantity
supplied
2. 6KLIWVLQHLWKHUWKHGHPDQGFXUYHRUWKHVXSSO\FXUYH³DFKDQJHLQHLWKHUGHPDQG
RUVXSSO\´RUERWKwill alter the equilibrium price
Market Equilibrium
Price Quantity Demanded Quantity Supplied
5 5 6
4 3 5
3 4 4
2 6 3
1 9 0
Equilibrium Price
P = 3 QD = QS = 4
Any Other Price: market forces will change
1) P = 4 QD = 3 QS = 5
QD < QS Æ surplus Æ price falls
2) P = 2 QD = 6 QS = 3
QD > QS Æ shortage Æ price rises
To Determine How an Event Will Affect a Market
1. Decide whether event affects supply or demand
2. Decide direction of shift
3. Use supply and demand to identify change in equilibrium
Examples:
(1) Unusually warm winter in North America and the price of hotel rooms in Caribbean
resorts:
www.notesolution.com
Substitutes ³LQVWHDGRI´
Example: tea and coffee
Complements ³WRJHWKH
Example: coffee and cream
(2) If there is a boom coffee crop in Brazil, what happens to the price of tea?
(Coffee and tea are substitutes)
What happens to the price of textbooks?
(Coffee and textbooks are neither substitutes nor complements)
Æ SS shift to the right; move along in DD curve, no shift
(quantity demand increases due to increase in supplied)
SS
Q
P
DD
DD1
120
80
70
90
Å
Hotel Rooms
SS1
Q
P
DD
SS
P
P1
Q
Q1
Æ
Coffee
www.notesolution.com

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Description
Tuesday, September 29, 2009. Equilibrium in Competitive Markets 1. The equilibrium price occurs where quantity demanded is equal to quantity supplied 2. 6KLIWVLQHLWKHUWKHGHPDQGFXUYHRUWKHVXSSO\FXUYH³DFKDQJHLQHLWKHUGHPDQGRUVXSSO\´RUERWKwill alter the equilibrium price Market Equilibrium Price Quantity Demanded Quantity Supplied 5 5 6 4 3 5 3 4 4 2 6 3 1 9 0 Equilibrium Price P = 3 QD = QS = 4 Any Other Price: market forces will change 1) P = 4 QD = 3 QS = 5 QD < QS Æ surplus Æ price falls 2) P = 2 QD = 6 QS = 3 QD > QS Æ shortage Æ price rises To Determine How an Event Will Affect a Market 1. Decide whether event affects supply or demand 2. Decide direction of shift 3. Use supply and demand to identify change in equilibrium Examples: (1) Unusually warm winter in North America and the price of hotel rooms in Caribbean resorts: www.notesolution.com Substitutes ³LQVWHDGRI´ Example: tea and coffee Complements ³WRJHWKHU´ Example: coffee and cream (2) If there is a boom coffee crop in Brazil, what happens to the price of tea? (Coffee and tea are substitutes) What happens to the price of textbooks? (Coffee and textbooks are neither substitutes nor complements) Æ SS shift to the right; move along in DD curve, no shift (quantity demand increases due to increase in supplied) SS Q P DD DD1 120 80 70 90 Å Hotel Rooms SS1 Q P DD SS P P1 Q Q1 Æ Coffee www.notesolution.com Price of coffee (falls) Î demand for tea (substitute good) falls Æ at any given price, the quantity demanded for tea will fall (shift to the left in demand curve) Textbooks Æ The demand for textbooks remains unchanged since it is an unrelated good to coffee DD Q P DD1 SS P P1 Tea SS Q P DD Po Qo Textbooks www.notesolution.com (3) If there is an oil disaster in the Middle East, what happens to the price of used Cadillacs? (Gasoline and cars are complements) Æ A lower quantity of gasoline will be supplied (leftward shift) Price of oil will rise; price of gasoline will rise. Æ In the market for Used Cadillacs (if no supply effect), the price will fall because the higher price of gasoline will decrease demand. Æ Price declines (as does quantity bought and sold) SS Q P DD SS1 P1 P Q1 Q Oil SS Q P DD DD1 P P1 Q1 Q Used Cadillacs (If no supply effect) www.notesolution.com (4) An increase in the price of ground beef will: A) increase the demand for chicken, a substitute for beef; B) increase the demand for hamburger buns, a complement for beef; C) increase the quantity demanded for ground beef; D) decrease the quantity demanded of ground beef; E) both a) and d); DD Q P DD1 SS P P1 Used Cadillacs (If supply effect) Decline in Price (from P1 to P11) SS1 P11 www.notesolution.comTuesday, September 29, 2009. Equilibrium in Competitive Markets 1. The equilibrium price occurs where quantity demanded is equal to quantity supplied 2. $KL198L30L9K079K002,3.:7;0479K08:55O.:7;0 ,.K,3J0L30L9K0702,3 478:55O 47-49Kwill alter the equilibrium price Market Equilibrium Price Quantity Demanded Quantity Supplied 5 5 6 4 3 5 3 4 4 2 6 3 1 9 0 Equilibrium Price P = 3 Q = Q = 4 Any Other Price: market forces will change 1) P = 4 Q = 3 Q = 5 D S Q < Q surplus price falls 2) P = 2 Q = 6 Q = 3 Q > Q shortage price rises To Determine How an Event Will Affect a Market 1. Decide whether event affects supply or demand 2. Decide direction of shift 3. Use supply and demand to identify changein equilibrium Examples: (1) Unusually warm winter in North America and the price of hotel rooms in Caribbean resorts: www.notesolution.com
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