Equilibrium and Disequilibrium
How is the price and quantity of a good determined?
MARKET DEMAND & SUPPLY
$5
4
3
2
1
10
20
35
55
80
$5
4
3
2
1
60
50
35
20
5
x
200
B
U
Y
E
R
S
P
QD
BUSHELS
OF CORN
MARKET
DEMAND
2,000
4,000
7,000
11,000
16,000
x
200
S
E
L
L
E
R
S
12,000
10,000
7,000
4,000
1,000
P
QS
BUSHELS
OF CORN
MARKET
SUPPLY
EQUILIBRIUM
Graphically…
MARKET DEMAND & SUPPLY
7
S
P
Q
o
$5
4
3
2
1
2 4 6 8 10 12 14 16
P
QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
D
P
QS
Price of Corn
Quantity of Corn
CORN
MARKET
CORN
MARKET
Market
Clearing
Equilibrium
Consumer Surplus = A
Why?: The total value to consumers of quantity Q is represented by areas A+B+C. Because the consumers must pay B+C, only the area A is surplus for them.
Producer Surplus = B
Why?: Producers get revenue of B+C. B is their surplus because only payments of C are needed to attract the resources necessary to produce quantity Q.
GOVERNMENT-SET PRICES
Price Ceilings & Shortages
D
D
S
S
Legal Price Ceiling
P
Pc
SHORTAGE
P
Q
Price Ceilings and Shortages
D
D
S
S
Legal Price Floor
P
Pf
SURPLUS
Q
Qs
Qd
P
Q
GOVERNMENT-SET PRICES
Price Floors & Surpluses
Price Floors and Surplus