Market Equilibrium & Price Discovery

Demand Schedule

At any price how much a consumer is willing to spend. The lower the price the higher the demand.

Shift in the Demand Curve - Definition

A change in the quantity demanded at every given price, denoted by a new demand curve.

• Leftward Shift - Decrease in Demand

• Rightward Shift - Increase in Demand

Causes of a Shift in the Demand Curve

Always external factors:

• Substitutes: Coke and Pepsi. The price of Coke is decreasing, increasing its demand, therefore the demand for Pepsi decreases.

• Complements: Coffee and Sugar. The price of Coffee is decreasing, increasing its demand, therefore the demand for Sugar increases. 

• Changes in Income:

  • Normal Goods: As Income increases so does the demand for normal goods. 

  • Inferior Goods: As Income increases the demand for inferior goods decreases. 

    • Margarine (IG) is replaced by Butter (NG)

• Changes in Taste

• Changes in Demographics

• Changes in Expectations

Movement along the Demand Curve - Definition

Change in the quantity demanded of good as a result of a change in that good’s price.

Movement along the Demand Curve - Cause

Always internal decisions

• Change in Price

Supply Schedule

How much of a good or service would be supplied at different prices. As the price rises, the quantity supplied rises.

Shift in the Supply Curve - Definition

A change in the quantity supplied at any given price, represented by a new supply curve.

• Leftward Shift - Decrease in Supply

• Rightward Shift - Increase in Supply

Shift in the Supply Curve - Causes

Always External

• Changes in Input Price

• Changes in the Price of related Goods and services in co-production

• Changes in technology

• Changes in expectations

• Changes in the quantity of producers

• Natural Disasters

Movement along the Supply Curve

Is a change in the quantity supplied of that good as a result of a change in that good’s price.

Equilibrium Definition

Equilibrium in a competitive market is when the quantity demanded of a good equals the quantity supplied of that good.

Equilibrium Price

Price at which quantity demanded equals quantity supplied

• Every buyer finds a seller and vice versa

• Quantity bought and sold at that price is the equilibrium quantity

Surplus

Supply > Demand

Prices above the equilibrium

Shortage

Demand > Supply

Prices below the equilibrium

Consumer Surplus Definition

A consumer’s willingness to pay for a good or service is the maximum price at which they would purchase.

Individual Consumer Surplus

Net gain to an individual buyer from the purchase of that good or service.

• ICS = Willingness to Pay - Price Paid

Total Consumer Surplus

Sum of all the individual consumer surpluses for a particular good. A fall in the price of a good increases consumer surplus:

• A gain to consumers who would have purchased at the original price

• A gain to consumers who are persuaded to buy by the lower price.

Potential Seller’s Cost

Lowest cost at which sellers are willing to sell

Individual producer surplus

Net gain to a seller from selling a good.

• IPS = Price received - Sellers Cost

Total Surplus

Total surplus generated in a market is the total net gain to consumers and producers from trading in the market. Sum of the consumer and producer surplus.

Price Ceiling

Maximum price sellers are allowed to charge for a good or service. Imposed during crisis like Covid 19.

Causes deadweight loss —> limiting market efficiency

Price Floor

Minimum price buyers are required to pay for a good or service. Pushes market prices up instead of down.

Causes deadweight loss —> limiting market efficiency

How are Price Floors and Ceilings Binding

• Price Floor - binding if set above equilibrium price

• Price ceiling - binding if set below equilibrium price