Market Equilibrium and Disequilibrium
Intro to Economics Lecture 7
Petar Stankov
[email protected]
2 Nov. 2010
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Outline
1
Demand and Supply: a Short Revision
2
Equilibrium and Changes in Equilibrium
3
Equilibrium Changes and Elasticity
4
Government Intervention: A Graphical Analysis
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Lecture 7
2 Nov. 2010
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Demand
The basic structure
The general form: Dx = f (px , px t+1 , ps , pc , Y , , ...)
A specific demand function: Dx = a − bpx + cpx t+1 + dY + eps − fpc + ε
A change in quantity demanded Vs. a shift in demand
Only if px changes we move along the curve. If anything else changes, we
move the curve itself. Why?
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Supply
The basic structure
The general form: Sx = f (px , px t+1 , pi , T , N, πalt , ...)
A specific supply function:
Sx = a + bpx − cpx t+1 − dpi + eT − fN − g πalt + ε
A change in quantity supplied Vs. a shift in supply
Only if px changes we move along the curve. If anything else changes, we
move the curve itself. Why?
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Lecture 7
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Equilibrium
Definition, graphical representation
Market equilibrium
Equilibrium is: Price px ∗ for which consumers are willing to buy exactly as
much as producers are willing to supply, namely: the quantity qx ∗ .
Shortage, surplus, and market clearing.
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Changes in Equilibrium
Case 1: Demand increases. How does Eqm. change?
Case 2: Supply decreases. How does Eqm. change?
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Changes in Equilibrium
The case of the housing market in UK and in BG
Why do we witness such movements? Draw the S and D graphs for the
two markets. Which of the two has increased more if the price
increased/decreased?
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Equilibrium changes and Elasticity
Case: Supply decreases. How does Eqm. change in case of elastic and
inelastic demand?
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Equilibrium changes and Elasticity (2)
Case 1: Demand increases. How does Eqm. change in case of elastic and
inelastic supply?
Case 2: Supply increases. How does Eqm. change in case of elastic and
inelastic demand?
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Advertising, Elasticity and Total Sales
Why do firms advertise?
Three main changes after
advertising:
1
Demand shifts to the right
2
Demand becomes less elastic
3
Total revenues increase
Does this happen for free?
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Further readings and exercises
Readings:
Sloman, p. 33-67
Exercises:
Sloman, p. 67
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Government Intervention
Setting price floors and ceilings
Real-life examples:
1
Price floors: minimum wages; CAP of the EU
2
Price ceilings: prices under socialism; rent-controls
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The effect of a price ceiling
Black market
The effect (problem): Qd Qs , consumers cannot find the good.
Solution: Queue, or buy on the black market.
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Government Intervention
The case of taxation
Two types of taxes:
1 Ad-valorem tax: p at = p(1 + τ )
2 Specific tax: p at = p + t
Examples for ad-valorem taxes: import tariffs
Examples for specific taxes: VAT, excise tax on tobacco and petrol
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Other cases of intervention
Free healthcare, banning drugs
Further problems: Sloman, p. 87
Don’t miss: economist.com; wsj.com
P. Stankov (UNWE, CERGE-EI)
Further readings: Sloman, p.
69-87
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