HGov APMacro: Equilibrium


market-equilibrium-l3fig26
Together supply and demand explain how prices are determined and how markets function. The price at which the quantity demanded equals the quantity supplied is the equilibrium price.

shortage v surplus D-S graph

A shortage occurs when the quantity demanded is greater than the quantity supplied. Shortages put pressure on prices to rise. A surplus occurs when the quantity demanded is less than the quantity supplied. Surpluses put pressure on prices to fall.

Price floors and ceilings and how they affect the supply and demand graphs. Price floors and price ceilings are price controls, examples of government intervention in the free market which changes the market equilibrium. They each have reasons for using them, but there are large efficiency losses with both of them.

price floor_price ceiling
Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance. Price floors are only an issue when they are set above the equilibrium price, since they have no effect if they are set below market clearing price. When they are set above the market price, then there is a possibility that there will be an excess supply or a surplus.

Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them. Price ceilings only become a problem when they are set below the market equilibrium price. When the ceiling is set below the market price, there will be excess demand or a supply shortage.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: