Supply and Demand: Equilibrium, Surpluses, Shortages, and Shifts

  • Equilibrium Price and Quantity: The equilibrium price is the point where the quantity demanded equals the quantity supplied (QD = QS).

    • Example (Uber): An early example suggested an equilibrium price of 13.25 where the number of people willing to pay equals the number of rides sellers want to provide.

    • Example (Algebraic Solution):

      • Given a supply curve formula like P=Q.

      • Given a demand curve formula like P=6-Q.

      • To find equilibrium, set the two equations equal: Q = 6-Q.

      • Solve for Q: 2Q = 6, so Q = 3.

      • Substitute Q=3 back into either formula to find P: P=3. The equilibrium price is 3 and the equilibrium quantity is 3.

    • Importance of Algebraic Method: It is faster than creating two tables (supply schedule and demand schedule) to find the intersection.

    • Collaborative Learning: Students are encouraged to explain the algebraic solution to peers, as explaining helps solidify understanding for exams.

  • Uniform Price Assumption and Real-World Application (Uber):

    • Strict Assumption: The concept of a single market-clearing price is based on a strict assumption that not all markets follow.

    • Uber as a Model: Uber successfully brings buyers and sellers together using its app and profits from this.

    • Dynamic Pricing: Uber's dynamic pricing model adjusts prices to account for varying supply and demand (e.g., more demand for rides than available drivers or vice-versa).

    • Limitations of Assumption: Markets like comparing prices at ShopRite versus Wegmans (where consumers may drive to a different store for a better price) do not fit this initial model directly, but the insights from the simple model can be extended with added complexity.

  • Surplus and Shortage: Market prices naturally adjust to eliminate surpluses and shortages.

    • Surplus: Occurs when the quantity supplied (QS) exceeds the quantity demanded (QD) (QS > QD).

      • Example: Manager specials at a grocery store (e.g., 75% off) are a result of setting prices too high initially, leading to unsold inventory. To avoid giving products away or incurring holding costs, the price is lowered.

      • Uber Example: If Uber drivers are floating around without passengers (costing them money), they will be willing to accept a lower price, and dynamic pricing would push prices down.

      • Graphical Representation: At a price above equilibrium (e.g., 13.75), more drivers are willing to supply rides than people are willing to demand, leading to a surplus.

      • Market Adjustment: Surpluses don't last because sellers reduce prices to sell off excess goods, moving the market toward equilibrium.

    • Shortage: Occurs when the quantity demanded (QD) exceeds the quantity supplied (QS) (QD > QS).

      • Example: Products selling out quickly because the price was set too low. Sellers realize they can raise prices.

      • Uber Example: If many people want rides at a low price (e.g., $$12.75) but few drivers are willing to provide them, a shortage occurs. Uber's dynamic pricing will set a higher price to attract more drivers and move towards equilibrium.

      • Market Adjustment: Shortages lead to price increases as buyers compete for limited goods, or sellers realize they can charge more, moving the market toward equilibrium.

  • Shifts in Demand and Supply Curves:

    • Demand Shift to the Left (Decrease in Demand):

      • Scenario: Fewer people want to buy at every price (e.g., Friday morning vs. Friday afternoon for Uber on a college campus).

      • Effect: Both equilibrium price and equilibrium quantity will fall.

      • Mechanism: The demand curve moves closer to the origin, causing a movement along the supply curve to a new, lower intersection point.

    • Supply Shift to the Left (Decrease in Supply):

      • Scenario: Sellers are willing to provide a lower quantity at every price.

      • Effect: Equilibrium price will rise, and equilibrium quantity will fall.

      • Mechanism: The supply curve moves closer to the origin, causing a movement along the demand curve to a new, higher price and lower quantity intersection point.

    • Simultaneous Shifts: When both curves shift, the effect on either price or quantity (or both) can be ambiguous, depending on the relative magnitude of the shifts.

      • Example (Demand Increase and Supply Increase - Both Shift Right): Quantity will definitely increase, but the effect on price will be ambiguous (whether it's higher or lower depends on which shift is larger).

      • Pedagogical Advice: Students should practice covering answers in textbooks and trying to predict outcomes of shifts and ambiguous cases.

  • Factors Affecting Shifts: Understanding what causes shifts is crucial.

    • Example (Housing Market): An increase in house prices might shift apartment demand to the right (more people want apartments).

    • Example (New Apartment Buildings): The opening of new apartment buildings represents a shift in supply to the right (more apartments available at every price).

  • Resources and Support:

    • Video Resources: Recommended videos from platforms like Marginal Revenue University explain concepts like the supply curve representing costs (e.g., drilling for oil at different prices).

    • Homework: Homework questions will test understanding.

    • Office Hours/TAs: Instructor and TAs are available for help, including TAs who are non-native English speakers and can assist in other languages (e.g., Spanish, Chinese).

  • Next Topic: The class will transition to discussing producer surplus and consumer surplus in the next session, encouraging students to read the chapter beforehand.