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 (Q<em>D=Q</em>SQ<em>D = Q</em>S).

    • Example (Uber): An early example suggested an equilibrium price of 13.25wherethenumberofpeoplewillingtopayequalsthenumberofridessellerswanttoprovide.</p></li><li><p><strong>Example(AlgebraicSolution)</strong>:</p><ul><li><p>Givenasupplycurveformulalike13.25 where the number of people willing to pay equals the number of rides sellers want to provide.</p></li><li><p><strong>Example (Algebraic Solution)</strong>:</p><ul><li><p>Given a supply curve formula likeP=Q.</p></li><li><p>Givenademandcurveformulalike.</p></li><li><p>Given a demand curve formula likeP=6-Q.</p></li><li><p>Tofindequilibrium,setthetwoequationsequal:.</p></li><li><p>To find equilibrium, set the two equations equal:Q = 6-Q.</p></li><li><p>Solvefor.</p></li><li><p>Solve forQ::2Q = 6,so, soQ = 3.</p></li><li><p>Substitute.</p></li><li><p>SubstituteQ=3backintoeitherformulatofindback into either formula to findP::P=3.Theequilibriumpriceis. The equilibrium price is3andtheequilibriumquantityisand the equilibrium quantity is3.</p></li></ul></li><li><p><strong>ImportanceofAlgebraicMethod</strong>:Itisfasterthancreatingtwotables(supplyscheduleanddemandschedule)tofindtheintersection.</p></li><li><p><strong>CollaborativeLearning</strong>:Studentsareencouragedtoexplainthealgebraicsolutiontopeers,asexplaininghelpssolidifyunderstandingforexams.</p></li></ul></li><li><p><strong>UniformPriceAssumptionandReal−WorldApplication(Uber)</strong>:</p><ul><li><p><strong>StrictAssumption</strong>:Theconceptofasinglemarket−clearingpriceisbasedonastrictassumptionthatnotallmarketsfollow.</p></li><li><p><strong>UberasaModel</strong>:Ubersuccessfullybringsbuyersandsellerstogetherusingitsappandprofitsfromthis.</p></li><li><p><strong>DynamicPricing</strong>:Uber′sdynamicpricingmodeladjustspricestoaccountforvaryingsupplyanddemand(e.g.,moredemandforridesthanavailabledriversorvice−versa).</p></li><li><p><strong>LimitationsofAssumption</strong>:MarketslikecomparingpricesatShopRiteversusWegmans(whereconsumersmaydrivetoadifferentstoreforabetterprice)donotfitthisinitialmodeldirectly,buttheinsightsfromthesimplemodelcanbeextendedwithaddedcomplexity.</p></li></ul></li><li><p><strong>SurplusandShortage</strong>:Marketpricesnaturallyadjusttoeliminatesurplusesandshortages.</p><ul><li><p><strong>Surplus</strong>:Occurswhenthequantitysupplied(QS)exceedsthequantitydemanded(QD)(.</p></li></ul></li><li><p><strong>Importance of Algebraic Method</strong>: It is faster than creating two tables (supply schedule and demand schedule) to find the intersection.</p></li><li><p><strong>Collaborative Learning</strong>: Students are encouraged to explain the algebraic solution to peers, as explaining helps solidify understanding for exams.</p></li></ul></li><li><p><strong>Uniform Price Assumption and Real-World Application (Uber)</strong>:</p><ul><li><p><strong>Strict Assumption</strong>: The concept of a single market-clearing price is based on a strict assumption that not all markets follow.</p></li><li><p><strong>Uber as a Model</strong>: Uber successfully brings buyers and sellers together using its app and profits from this.</p></li><li><p><strong>Dynamic Pricing</strong>: 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).</p></li><li><p><strong>Limitations of Assumption</strong>: 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.</p></li></ul></li><li><p><strong>Surplus and Shortage</strong>: Market prices naturally adjust to eliminate surpluses and shortages.</p><ul><li><p><strong>Surplus</strong>: Occurs when the quantity supplied (QS) exceeds the quantity demanded (QD) (QS > QD).</p><ul><li><p><strong>Example</strong>:Managerspecialsatagrocerystore(e.g.,75).</p><ul><li><p><strong>Example</strong>: 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.</p></li><li><p><strong>Uber Example</strong>: 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.</p></li><li><p><strong>Graphical Representation</strong>: 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.