ECON

Equilibrium in Economics

• Definition of Equilibrium

  • Equilibrium refers to the state in a market where supply equals demand, meaning the quantity supplied matches the quantity demanded.

  • At equilibrium, the market is considered 'cleared' where no excess supply or demand exists.

Relationship between Price, Supply, and Demand

• Law of Demand

  • The law of demand indicates a negative relationship between price and quantity demanded.

  • Buyers tend to prefer lower prices; therefore, when the price is low, they want to buy more. Conversely, as prices increase, the quantity demanded decreases.

• Supply Perspective

  • Sellers are incentivized by higher prices.

  • They are willing to supply more at higher prices, while lower prices discourage greater supply.

• Intuitive Understanding of Slopes

  • The slopes of the demand and supply curves are intuitive; demand slopes downwards due to buyer preferences for lower prices, while supply slopes upwards due to seller incentives to offer goods at higher prices.

Graphical Representation

• Lemonade Experiment

  • A graphical demonstration can be made using examples like lemonade pricing in different seasons to illustrate demand and supply shifts.

  • Determinants of both demand and supply should be clearly shown on the graphs, indicating the various factors affecting them.

Determinants of Demand and Supply

• Price of the Good

  • Changes in the price of the good lead to movements along the demand and supply curves, reflecting changes in quantity demanded and supplied.

• Other Factors Affecting Demand

  • Other factors—such as income levels, preferences, and competition—shift the demand curve entirely rather than causing movement along it.

• Supply Side Factors

  • Similar to demand, other factors impacting supply, such as production cost and technology, will also cause shifts in the supply curve.

Comparative Statics

• Definition

  • Comparative statics is a tool used in economics to compare the equilibrium conditions before and after a shock or change in the market.

  • Understanding this concept is essential for evaluating how different factors influence market equilibrium.

• Example: Hurricane Impact on Hotel Prices

  • When Hurricane Sandy occurred, it led to increased demand for hotel rooms as people sought shelter.

  • Resulting price increases for hotel rooms can be explained through demand theory.

  • Criticism of high prices during crises raises ethical considerations about the morality of profit during disasters.

Discussion Points

• Ethical Considerations

  • Should hotels be allowed to raise prices during emergencies or should they maintain fairness? Differences between business ethics and economic principles.

  • Views among students about fairness vs. market-driven pricing were shared, showcasing different perspectives on supply and demand dynamics.

Supply and Demand Curves During Shocking Events

• Demand Shift

  • Following disasters, such as hurricanes, demand for certain goods (e.g., housing, food, accommodations) shifts to the right indicating a sudden increase.

• Supply Response

  • The supply may not increase immediately due to existing stocks, and occupancy may lead to scarcity; however, it does not shift as dramatically compared to demand.

Potential Policy Responses

• Government Price Controls

  • Price ceilings may be established to regulate prices of necessities, but this often leads to shortages as quantity demanded exceeds quantity supplied.

  • Example of rent control can showcase how good intentions may lead to unintended consequences like severe shortages in housing availability.

• Effects of Price Controls

  • Consequences of implementing a price ceiling, such as restricted quantity supplied and increased demand resulting in an excess demand or shortage.

  • Analyzing real-world cases like Venezuela, where price controls led to empty shelves and increased reliance on black markets.

Conclusion on Economic Principles

• Power of Market Mechanisms

  • Free market mechanisms effectively allocate resources, but they can also lead to perceived inequalities based on price rationing.

• Critical Thinking

  • Economics involves critical assessment of policies; having a strong foundation can empower individuals to make informed decisions about societal issues related to resource distribution.

Class Engagement and Exercises

• A focus on class interactions, discussions on pressing economic issues, and real-world applications of theories were emphasized, with encouragement for students to engage actively in discussions.

• Homework assignments were given to further reinforce understanding and application of the lesson material, as well as foster deeper analysis of subject matter.